Kaylin Company purchased a piece of equipment for £100,000 that had a useful life of 5 years. The equipment had no salvage value. It saves the company £40,000 a year and costs the company £5,000 a year to operate. What is the accounting rate of return on the equipment?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The annual profit is the savings minus the operating costs, which is £40,000 - £5,000 = £35,000. Over 5 years, this totals £175,000, but since ARR is based on annual figures, we use the annual profit of £35,000. The initial investment is £100,000. Thus, ARR = (£35,000 / £100,000) * 100% = 35%.

Kaylin Company Purchased a Piece of Equipment for £100,000 That