Sayer Tool Co. is considering investing in specialized equipment costing $610,000. The equipment has a useful life of five years and a residual value of $69,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below: $\begin{array}{|r|r|}
\hline\text { Year 1 } & \$ 210,000 \
\hline 2 & 159,000 \
\hline 3 & 160,000 \
\hline 4 & 95,000 \
\hline 5 & \underline{136,000} \
\hline & 7660,000 \
\hline
\end{array}$ What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

Question

Sayer Tool Co. is considering investing in specialized equipment costing $610,000. The equipment has a useful life of five years and a residual value of $69,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below: $\begin{array}{|r|r|}
\hline\text { Year 1 } & \$ 210,000 \
\hline 2 & 159,000 \
\hline 3 & 160,000 \
\hline 4 & 95,000 \
\hline 5 & \underline{136,000} \
\hline & 7660,000  \
\hline
\end{array}$ What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

Quizplus · Accepted Answer

The Accounting Rate of Return (ARR) is calculated as the average annual operating income divided by the initial investment cost. The operating income is the net cash inflows minus annual depreciation. The total cost of the equipment is $610,000, and its residual value is $69,000, leading to a total depreciation of $610,000 - $69,000 = $541,000 over five years. Annual depreciation is $541,000 / 5 = $108,200. The total net cash inflows over five years is $760,000 (correcting the typo from "7660,000"). The average annual net cash inflow is $760,000 / 5 = $152,000. The average annual operating income is $152,000 - $108,200 = $43,800. The ARR is ($43,800 / $610,000) * 100 = 7.18%, but none of the options match this calculation, suggesting a possible misunderstanding in the calculation or the provided options.

Sayer Tool Co What Is the Accounting Rate of Return on the Investment