Ellis Retail
Ellis Retail is considering an investment in a delivery truck.Ellis has found a used truck that he can purchase for $8,000.He estimates the truck would last six years and increase his store's net cash revenues by $2,000 per year.At the end of six years,the truck would have no salvage value and would be discarded.Ellis will depreciate the truck using the straight-line method.
Refer to Ellis Retail.What is the accounting rate of return on the truck investment (based on average profit and average investment)?

Question

Quizplus · Accepted Answer

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

Average annual profit = Total net cash increase over six years / number of years = $2,000 x 6 = $12,000
Average investment = (Initial cost + Salvage value) / 2 = ($8,000 + $0) / 2 = $4,000

Accounting rate of return = Average annual profit / Average investment = $12,000 / $4,000 = 3.0 or 16.7% (rounded to the nearest tenth)

Therefore, the best choice is C. The accounting rate of return on the truck investment is 16.7%.

Ellis Retail Ellis Retail Is Considering an Investment in a Delivery Truck.Ellis