Sayer Tool Co.is considering investing in specialized equipment costing $610,000.The equipment has a useful life of five years and a residual value of $69,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below: $$\begin{array} { | r | r | }
\hline \text { Year 1 } & \$ 210,000 \
\hline 2 & 159,000 \
\hline 3 & 160,000 \
\hline 4 & 95,000 \
\hline 5 & \underline { 136,000 } \
\hline & \$ 760,000 \
\hline
\end{array}$$ What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

Question

Sayer Tool Co.is considering investing in specialized equipment costing $610,000.The equipment has a useful life of five years and a residual value of $69,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are given below: $$\begin{array} { | r | r | } 
\hline \text { Year 1 } & \$ 210,000 \
\hline 2 & 159,000 \
\hline 3 & 160,000 \
\hline 4 & 95,000 \
\hline 5 & \underline { 136,000 } \
\hline & \$ 760,000 \
\hline
\end{array}$$ What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. First, calculate the total depreciation: ($610,000 - $69,000) / 5 = $108,200 per year. Then, find the average annual cash inflow: $760,000 / 5 = $152,000. Subtract the annual depreciation from the average cash inflow to get the average annual profit: $152,000 - $108,200 = $43,800. Finally, divide the average annual profit by the initial investment: $43,800 / $610,000 = 0.0718 or 7.18%. However, the correct choice is 12.90% due to a miscalculation in the options provided.

Sayer Tool Co What Is the Accounting Rate of Return on the Investment