Danny Bostic is evaluating a new ticketing system for his theater. The system will cost $275,000 and

Question:

Danny Bostic is evaluating a new ticketing system for his theater. The system will cost $275,000 and will save the theater $57,800 in annual cash operating costs. Danny expects the new system to last ten years, at which time the system will have a salvage value of $15,000. If Danny purchases the new system, he will be able to sell his existing system for $10,000.

Required

a. Calculate the accounting rate of return for the proposed ticketing system.

b. Danny Bostic wants to earn a minimum accounting rate of return of 10% on his projects. Should he invest in the new equipment? Why or why not?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...