The following data concerns a proposed equipment purchase: Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:
A)62.3%.
B)32.0%.
C)15.0%.
D)7.7%.
E)5.0%.

Question

The following data concerns a proposed equipment purchase:  Assuming that net cash flows are received evenly throughout the year,the accounting rate of return is:
A)62.3%. 
B)32.0%. 
C)15.0%. 
D)7.7%. 
E)5.0%.

Quizplus · Accepted Answer

To calculate accounting rate of return, we need to divide the average annual profit by the initial investment.

Average annual profit = (Total Revenue - Total Expenses) / Number of Years 
Total revenue = $380,000 
Total expenses = $290,000 
Number of years = 5

Average annual profit = ($380,000 - $290,000) / 5 = $18,000

Accounting Rate of Return = (Average Annual Profit / Initial Investment) x 100% 
Initial Investment = $120,000

Accounting Rate of Return = ($18,000 / $120,000) x 100% = 15.0%

Thus, the best choice is C) with an accounting rate of return of 15.0%.

The Following Data Concerns a Proposed Equipment Purchase: Assuming