Imagine Cairns' BarrierReef Lodge is appraising a January 1st 20X0 investment of $8,000 in a drinks vending machine that will increase accounting profits by $1,000 in 20X0, $2,000 in 20X1 and $3,000 in 20X2. At the end of 20X2, it is estimated the vending machine will be sold for $2,000. What is the projected accounting rate of return for the investment?

Question

Quizplus · Accepted Answer

The accounting rate of return is computed as the average annual accounting profit divided by the initial investment. The total accounting profit over the three-year period is $6,000 ($1,000 + $2,000 + $3,000). The average annual accounting profit is therefore $2,000 ($6,000 total profit divided by 3 years), and the accounting rate of return is 25% ($2,000 average profit divided by $8,000 initial investment).

Imagine Cairns' BarrierReef Lodge Is Appraising a January 1st 20X0