Figure 13-6
JD, Inc., is considering the purchase of production equipment that costs £400,000. The equipment is expected to generate annual cash inflows of £125,000. The equipment is expected to have a useful life of five years with no salvage value. The firm's cost of capital is 12 per cent.
-Refer to Figure 13-6. If depreciation is £90,000 per year, JD's accounting rate of return based on the average investment would be

Question

Quizplus · Accepted Answer

The accounting rate of return based on the average investment is calculated as follows:ARR = (Average annual accounting income / Average investment) x 100%Average annual accounting income = Annual cash inflows - Depreciation= £125,000 - £90,000= £35,000Average investment = (Initial investment + Salvage value) / 2= (£400,000 + £0) / 2= £200,000ARR = (£35,000 / £200,000) x 100%= 17.5%

Figure 13-6 JD, Inc., Is Considering the Purchase of Production Equipment That