Use the information below to answer the following question(s).Jupiter Ltd.wants to automate one of its production processes.The new equipment will cost $90,000.In addition, Jupiter will incur installation and testing costs of $5,000 and $4,500 respectively.The expected life of the equipment is 5 years and the salvage value of the equipment is estimated at $12,000.The annual cash savings are estimated at $29,000.The company uses straight-line depreciation and has a required rate of return of 9%.Ignore income taxes.
-What is the accrual accounting rate of return for the investment Jupiter Ltd.is considering?
A)14.2%
B)11.6%
C)9.5%
D)14.9%
E)11.0%

Question

Quizplus · Accepted Answer

The accrual accounting rate of return is calculated as the average annual profit divided by the initial investment. The total cost of the equipment is $99,500 ($90,000 + $5,000 + $4,500). The annual depreciation is ($99,500 - $12,000) / 5 = $17,500. The annual profit is $29,000 (cash savings) - $17,500 (depreciation) = $11,500. The accrual accounting rate of return is $11,500 / $99,500 = 11.6%.

Use the Information Below to Answer the Following Question(s)