Belmont 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 $200,000.The equipment will have an initial cost of $1,000,000 and have an 8-year life.If there is no salvage value of the equipment,what is the accounting rate of return?

Question

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The Accounting Rate of Return (ARR) is calculated as the average annual profit from an investment divided by the initial cost of the investment. Here, the annual increase in net income after tax is $200,000, and the initial cost is $1,000,000. ARR = ($200,000 / $1,000,000) * 100% = 20%.