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ARR Analysis for Business Investments

Diana owns a candle business and is considering two machines, the Candle Wizard and Wax Wonder, to increase production. The Candle Wizard costs N$90,000 with total 5-year profits of N$130,000 while the Wax Wonder costs N$110,000 with total profits of N$180,000. Based on the higher total profits, the Wax Wonder is the better investment. Robert owns a breakfast delivery business and must choose between buying a new delivery van for N$25,000 with N$56,250 total 5-year profits or upgrading storage for N$35,000 with N$70,500 total profits. Tjikuzu manages a c

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Theresia Robert
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160 views2 pages

ARR Analysis for Business Investments

Diana owns a candle business and is considering two machines, the Candle Wizard and Wax Wonder, to increase production. The Candle Wizard costs N$90,000 with total 5-year profits of N$130,000 while the Wax Wonder costs N$110,000 with total profits of N$180,000. Based on the higher total profits, the Wax Wonder is the better investment. Robert owns a breakfast delivery business and must choose between buying a new delivery van for N$25,000 with N$56,250 total 5-year profits or upgrading storage for N$35,000 with N$70,500 total profits. Tjikuzu manages a c

Uploaded by

Theresia Robert
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Question 1

Diana owns a business manufacturing fragranced candles. Diana is looking to expand her business; to
do this, she will need to buy some new machinery to help produce more fragranced candles. Diana
has searched online and found two suitable machines to help her achieve increased output. The cost
of buying each machine and the annual estimated net profits are provided in the table below:
Candle Wizard cost Wax Wonder cost
N$90 000 N$110 000
Year 1 net profit N$20 000 N$10 000
Year 2 net profit N$30 000 N$20 000
Year 3 net profit N$40 000 N$40 000
Year 4 net profit N$20 000 N$60 000
Year 5 net profit N$20 000 N$50 000
Total net profit N$130 000 N$180 000
Required: Which of these machines should Diana invest in? justify your answer with appropriate
calculations.

Question 2
Robert owns a business that transports breakfast to offices across much of Windhoek. The business is
growing and wants to invest more money in either buying another delivery van or upgrading the
storage space for food at the current facilities. Robert’s budget is N$40 000 and can only choose one
option. The following information is available for each of the options:
Net Profit New delivery van Upgrade to storage space
Year 1 N$12 000 N$13 000
Year 2 N$13 500 N$13 000
Year 3 N$16 000 N$13 000
Year 4 N$16 500 N$14 000
Year 5 N$16 750 N$14 500

Cost N$25 000 N$35 000

Required:
a) Calculate the ARR for each option as a percentage and give your answers to 2 decimal places.
b) Which of the two options should be chosen based on the ARR calculation?

Question 3
Tjikuzu manages a small courier business in Windhoek. He wants to expand his business by buying a
van and employing another driver in addition to the two vans and two drivers he already has working
for his business. Due to the high number of miles anticipated to be driven each year, the van will not
be kept for a long time. Tjikuzu has provided the following information about the van he is considering
buying and would like to know the ARR for the van before making a decision to buy it.
Cost of van N$22 000
Total net profit for the life of the van N$56 000
Estimated life N$30 000
Required: Calculate the ARR as a percentage to two decimal places.

Question 4
Kaunatjike owns a dry cleaning and clothing repair business, which she wants to expand after two
years of making a profit. As part of her expansion plans, Kaunatjike is planning to spend money on a
new industrial sewing machine. Kaunatjike has narrowed her choices to two options. She can only
afford to spend money on one of the options.
Net Profit Fabric Fastener Super Saver
Cost N$35 000 N$40 000
Total net profit N$77 000 N$84 500
Life of machine 3 years 5 years
Required: Which of the two options should be chosen based on the ARR calculation?

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