Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment?

Question

Quizplus · Accepted Answer

B) Calculations:
$1,200,000 - $810,000 = $390,000
$390,000/10 = $39,000
($900,000 + $90,000)/2 = $495,000
$39,000/$495,000 = 7.9 %

Clapton Corporation Is Considering an Investment in New Equipment Costing