Container Ltd, a manufacturing firm, is considering investing $110,000 in a new mainframe computer. It is estimated that net cash flow per year will be $30,000 and the computer will have a 10-year useful life and zero residual value. The machine will be depreciated on a straight-line basis. What is the accounting rate of return?

Question

Quizplus · Accepted Answer

The Accounting Rate of Return (ARR) is calculated as the average annual profit divided by the initial investment. Here, the annual depreciation is ($110,000 / 10 years) = $11,000. The annual profit before depreciation is $30,000, so the annual profit after depreciation is ($30,000 - $11,000) = $19,000. The ARR = ($19,000 / $110,000) * 100 = 17.27%. However, the correct calculation for ARR in this context should consider the average annual profit (without subtracting depreciation, as it's a non-cash expense for this purpose) divided by the initial investment, which gives ($30,000 / $110,000) * 100 = 27.27%. It seems there was a mistake in the calculation provided in the choices, and none of the options accurately reflect the correct calculation based on the standard formula. The closest correct answer based on the provided options and standard calculation method should be 27.27%, but since this option is not available, and based on the provided choices, there seems to have been a misunderstanding in the explanation or the calculation method intended.

Container Ltd, a Manufacturing Firm, Is Considering Investing $110,000 in a New