Oakland Shop is considering the purchase of a used printing press costing $9,600.The printing press would generate a net cash inflow of $4,000 per year for three years.At the end of three years,the press would have no salvage value.The company's cost of capital is 10 percent.The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent,assuming no taxes are paid?

Question

Quizplus · Accepted Answer

To calculate the accounting rate of return, we need to use the formula: (Average annual income from investment / Initial investment) x 100%
The average annual income from investment = (Total net cash inflow over the life of the investment / Number of years) = ($4,000 x 3) / 3 = $4,000
Initial investment = $9,600
So, the accounting rate of return = ($4,000 / $9,600) x 100% = 41.67%
Since the cost of capital is 10%, the accounting rate of return is less than the cost of capital, which means the investment is not profitable from an accounting perspective. Therefore, the best choice is not to purchase the printing press.

Oakland Shop Is Considering the Purchase of a Used Printing