Pearl Manufacturing is considering an investment in equipment costing $660 000. The equipment will be depreciated on the straight- line basis over an eight- year period with an estimated residual value of $120 000. The investment is expected to generate annual net cash inflows of $135 000 for 8 years. Using the accounting rate of return model, what is the minimum average annual profit that must be generated from this investment in order to achieve a 14% accounting rate of return?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. To achieve a 14% ARR, the average annual profit must be 14% of the initial investment. The initial investment is $660,000. Therefore, the required average annual profit is 0.14 * $660,000 = $92,400.

Pearl Manufacturing Is Considering an Investment in Equipment Costing $660