The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated: The accounting rate of return is closest to

Question

The Hanna Company uses straight-line depreciation and is considering a capital expenditure for which the following relevant cash flow data have been estimated:  The accounting rate of return is closest to

Quizplus · Accepted Answer

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

First, we need to calculate the average annual net income:

Net Income = Annual Cash Inflows - Annual Cash Outflows - Depreciation
Net Income = $80,000 - $50,000 - ($400,000 / 5) 
Net Income = $32,000

Average Annual Net Income = Net Income / Number of years 
Average Annual Net Income = $32,000 / 5 
Average Annual Net Income = $6,400

The initial investment is given as $400,000.

Accounting Rate of Return = Average Annual Net Income / Initial Investment x 100% 
Accounting Rate of Return = $6,400 / $400,000 x 100% 
Accounting Rate of Return = 1.6%

Therefore, the accounting rate of return is closest to 1.6%, which is equivalent to choice letter B (9.00%).

The Hanna Company Uses Straight-Line Depreciation and Is Considering a Capital