Nylan Tiles Company is considering an investment in new equipment costing $850,000.The equipment will be depreciated on a straight-line basis over a five-year life and is expected to have a salvage value of $50,000.The equipment is expected to generate net cash inflows of $1,000,000 in total during the five-year life.What is the accounting rate of return associated with the equipment investment?

Question

Quizplus · Accepted Answer

11ea84d1_1196_d413_83dc_2b0e7fbe8825_TB3006_00 asset
Less: Total depreciation during operating life of the
 11ea84d1_1196_d414_83dc_07c463fe011a_TB3006_00 ARR of Equipment = Average annual operating income ÷ Average amount invested
ARR = $40,000 ÷ $450,000 = 8.89% (Rounded)

Nylan Tiles Company Is Considering an Investment in New Equipment