Palmer Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income after tax of $100,000.The equipment will have an initial cost of $400,000 and have a 7-year life.If the salvage value of the equipment is estimated to be $75,000,what is the accounting rate of return?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment cost. Here, the average annual profit is $100,000, and the initial investment is $400,000. ARR = ($100,000 / $400,000) * 100% = 25.00%.