George William buys a machine for his business. The machine costs $150,000. George estimates that the machine can produce $40,000 cash inflow per year for the next five years. George's cost of capital is 10 percent. What is the accounting rate of return?

Question

Quizplus · Accepted Answer

The Accounting Rate of Return (ARR) is calculated by dividing the average annual profit by the initial investment cost. The average annual profit is the cash inflow per year ($40,000) minus any annual costs, which are not provided here, so we assume $40,000 is the net inflow. The initial cost of the machine is $150,000. Therefore, ARR = ($40,000 / $150,000) * 100% = 26.67%.

George William Buys a Machine for His Business