MacEwen Brothers Ltd., which is subject to an 18% income tax rate, is considering investing in a $300,000 asset that will result in the following over its five-year life: Average revenue: $805,000
Average operating expenses (excluding depreciation): $620,000
Average depreciation: $80,000
The accounting rate of return on the initial investment is:

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The average annual profit is calculated as average revenue minus average operating expenses and depreciation, then adjusted for taxes. ARR = [(805,000 - 620,000 - 80,000) * (1 - 0.18)] / 300,000 = 28.70%.