Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000 and have a life of 5 years and a nil residual value. It will be ready for operation on 31 December 2014. The following income statement figures for the new binoculars are forecast: Depreciation has been calculated on a straight-line basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The accounting rate of return is:

Question

Use the information below to answer the following questions.
Y3 Ltd is expanding its production of binoculars. The plant is expected to cost $750,000 and have a life of 5 years and a nil residual value. It will be ready for operation on 31 December 2014. The following income statement figures for the new binoculars are forecast:  Depreciation has been calculated on a straight-line basis. You should assume that all cash flows occur at the end of the year in which they arise. The company's cost of capital is 10%. Ignore taxation.
-Refer to the table above. The accounting rate of return is:

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual profit by the initial investment, expressed as a percentage. In this case, the average annual profit is (200,000 + 100,000) / 2 = 150,000. The initial investment is $750,000. Therefore, the accounting rate of return is (150,000 / 750,000) x 100% = 20%.

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