Alpha Zeta is considering purchasing some new equipment costing $390,000. The equipment will be depreciated on a straight line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $18,900, $21,300, $26,700, and $25,000. What is the average accounting rate of return?
A) 11.78 percent
B) 11.93 percent
C) 12.01 percent
D) 12.49 percent
E) 13.20 percent

Question

Quizplus · Accepted Answer

The average accounting rate of return is calculated by dividing the average annual net income by the initial investment. The average annual net income is the sum of the net income for each year divided by the number of years. The initial investment is the cost of the equipment.In this case, the average annual net income is ($18,900 + $21,300 + $26,700 + $25,000) / 4 = $23,225. The initial investment is $390,000. Therefore, the average accounting rate of return is $23,225 / $390,000 = 11.78%.

Alpha Zeta Is Considering Purchasing Some New Equipment Costing $390,000