Los Gatos Shop is considering the purchase of a used wide-format printer costing $9,600. The wide-format printer would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the printer would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The average annual profit is the net cash inflow minus the annual depreciation. Depreciation is $9,600 / 3 = $3,200 per year. The average annual profit is $4,000 - $3,200 = $800. ARR = ($800 / $9,600) * 100% = 8.33%.

Los Gatos Shop Is Considering the Purchase of a Used