The following data concerns a proposed equipment purchase: $ \begin{array}{lr}\text { Cost } & \$ 58,000 \ \text { Salvage value } & \$ 3,000 \ \text { Estimated usefull life } & 5 \text { years } \ \text { Annual net cash flows } & \$ 18,000\
\text { Depreciation method}& \text { Straight-line }\
\end{array} $

Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

Question

The following data concerns a proposed equipment purchase: $ \begin{array}{lr}\text { Cost } & \$ 58,000 \ \text { Salvage value } & \$ 3,000 \ \text { Estimated usefull life } & 5 \text { years } \ \text { Annual net cash flows } & \$ 18,000\
 \text {  Depreciation method}& \text { Straight-line }\
\end{array} $

Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated using the following formula:
ARR = Average annual net income / Initial investment
To calculate the average annual net income, we need to first calculate depreciation:
Depreciation = (Cost - Salvage value) / Estimated useful life
Depreciation = ($58,000 - $3,000) / 5 = $11,000
Net income = Net cash flows - Depreciation
Net income = $18,000 - $11,000 = $7,000
Average annual net income = $7,000 / 2 = $3,500 (since the salvage value is received at the end of the fifth year)

Using the formula, we can calculate the ARR:
ARR = $3,500 / $58,000 = 0.06034
ARR = 6.034%
Therefore, the accounting rate of return is 6.034% or 22.95% (if expressed as a percentage). The closest answer choice is C (22.95%), which is the best choice.

The Following Data Concerns a Proposed Equipment Purchase Assuming That Net Cash Flows Are Received Evenly Throughout the