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 $25,000 and the computer will have a 10-year useful life and zero residual value.The machine will be depreciated on a straight-line basis.The accounting rate of return is:

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 $25,000, so the annual profit after depreciation is ($25,000 - $11,000) = $14,000. The ARR = ($14,000 / $110,000) * 100 = 12.72%. However, the correct calculation for ARR in this context should consider the average investment, which is ($110,000 + $0) / 2 = $55,000 (since the residual value is zero). Thus, ARR = ($14,000 / $55,000) * 100 = 25.45%.

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