Auto Detailers is buying some new equipment at a cost of $188,900.This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life.The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years.What is the average accounting rate of return?

Question

Quizplus · Accepted Answer

The average accounting rate of return is calculated by dividing the average annual net income by the average book value of the asset. The average annual net income is ($11,000 + $24,000) / 2 = $17,500. The average book value of the asset is $188,900 / 2 = $94,450. Therefore, the average accounting rate of return is $17,500 / $94,450 = 18.53%.

Auto Detailers Is Buying Some New Equipment at a Cost