The following data concerns a proposed equipment purchase: Cost $144,000
Salvage value $ 4,000
Estimated useful life 4 years
Annual net cash flows $ 46,100
Depreciation method Straight-line
Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is (ignore income taxes):

Question

Quizplus · Accepted Answer

Accounting rate of return is calculated as Average annual net cash inflow / Initial investment.

Average annual net cash inflow = Annual net cash flows / lifespan
= $46,100 / 4
= $11,525

Initial Investment = Cost - Salvage value = $144,000 - $4,000 = $140,000

Accounting rate of return = Average annual net cash inflow / Initial investment = $11,525 / $140,000 = 0.082 (or 8.2%)

Therefore, the answer is C (15.0%)

The Following Data Concerns a Proposed Equipment Purchase: Cost $144,000