Sawyer & Cecil,Computer Consultants,is considering an investment in computer and network equipment costing $254,000.This equipment would allow them to offer new programming services to clients.The equipment will be depreciated on the straight-line basis over an eight- year period with an estimated residual value of $60,000.Using the accounting rate of return model,what is the minimum average annual operating income that must be generated from this investment in order to achieve a 12% accounting rate of return?

Question

Quizplus · Accepted Answer

The accounting rate of return formula is:

Accounting Rate of Return = Average Annual Operating Income / Initial Investment x 100%

We have the initial investment, which is $254,000, and the accounting rate of return, which is 12%. We need to find the minimum average annual operating income that will result in a 12% accounting rate of return.

We know that the equipment will be depreciated over 8 years and will have a residual value of $60,000. Therefore, the depreciable base is $194,000 ($254,000 - $60,000). The yearly depreciation is then $24,250 ($194,000 / 8).

To find the minimum average annual operating income, we need to use the following formula:

Average Annual Operating Income = Accounting Rate of Return x Initial Investment / 100%

Average Annual Operating Income = 12% x $254,000 / 100%

Average Annual Operating Income = $30,480

Therefore, option C is the correct answer which is $30,480.

Sawyer & Cecil,Computer Consultants,is Considering an Investment in Computer and Network