Landrum Corporation is considering investing in specialized equipment costing $250,000.The equipment has a useful life of 5 years and a residual value of $20,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are:

Landrum Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

Question

Landrum Corporation is considering investing in specialized equipment costing $250,000.The equipment has a useful life of 5 years and a residual value of $20,000.Depreciation is calculated using the straight-line method.The expected net cash inflows from the investment are:

Landrum Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

Quizplus · Accepted Answer

A)
(Annual net cash flow - depreciation)/Investment = Accounting rate of return
($325,000/5 - (250,000 - 20,000)/5)/$250,000
($65,000 - $46,000)$/250,000 = 7.60 %

Landrum Corporation Is Considering Investing in Specialized Equipment Costing $250,000