An initial investment of $180,000 is expected to generate $90,000 in annual cost savings over the asset's expected 3-year life.Assume straight-line depreciation and ignore income taxes.The accounting rate of return based on initial investment is _____.

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) can be calculated as the average annual income divided by the initial investment. In this case, the average annual income is the total cost savings divided by the asset's expected life.

Average annual income = Total cost savings / Expected life
Average annual income = $90,000 / 3 = $30,000

ARR = Average annual income / Initial investment
ARR = $30,000 / $180,000
ARR = 16.67%

Therefore, the accounting rate of return based on initial investment is 16.67%, which corresponds to option C.

An Initial Investment of $180,000 Is Expected to Generate $90,000