George William buys a machine for his business.The machine costs $150,000.George estimates that the machine can produce $40,000 cash inflow per year for the next five years.George's cost of capital is 10 percent.What is the accounting rate of return?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated by dividing the average annual profit by the initial investment. The average annual profit is the total cash inflow over five years ($40,000 * 5 = $200,000) minus the initial investment ($150,000), divided by 5 years, which is $10,000. The ARR is then ($10,000 / $150,000) * 100% = 6.67%. However, the question seems to have an error in the choices, as none match this calculation.

George William Buys a Machine for His Business