Machine A is bought for $200,000 and has a residual value of $80,000 after six years of use. The amortization is straight-line and the annual profit before depreciation generated by the machine is $30,000. What is the ARR?

Question

Quizplus · Accepted Answer

ARR (Average Rate of Return) = Average Annual Profit before Depreciation / Initial Investment
Annual depreciation = (Initial cost - Residual value) / Useful life
= (200,000 - 80,000) / 6 = $20,000
Average Annual Profit before Depreciation = (Profit before Depreciation + Annual Depreciation) / 2
= (30,000 + 20,000) / 2 = $25,000
ARR = 25,000 / 200,000 = 0.125 = 12.5%
Therefore, the correct answer is option C (7.1%).

Machine a Is Bought for $200,000 and Has a Residual