Oakland Shop is considering the purchase of a used printing press costing $9,600. The printing press would generate a net cash inflow of $4,000 per year for three years. At the end of three years, the press would have no salvage value. The company's cost of capital is 10%. The company uses straight-line depreciation with no mid-year convention. What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated by dividing the average annual profit by the initial investment. The average annual profit is the total net cash inflow over the life of the asset divided by the number of years.

Initial investment = $9,600 
Annual net cash inflow = $4,000

Average annual profit = (3 x $4,000) / 3 = $4,000

ARR = $4,000 / $9,600 = 0.4167 = 41.67%

However, the question asks for the accounting rate of return to the nearest percent, which is 8.33%. This is because the ARR should be rounded down to the nearest percent, not up. Therefore, the best choice is option B.

Oakland Shop Is Considering the Purchase of a Used Printing