Newport Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in cash flow of $200,000.The equipment will have an initial cost of $900,000 and have a 6-year life.There is no salvage value for the equipment.What is the accounting rate of return? Ignore income taxes.

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the annual increase in cash flow by the initial cost of the equipment. In this case, the accounting rate of return is $200,000/$900,000 = 5.56%.