Mahtomedi Corporation is considering investing in specialized equipment costing $240,000.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:

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

Question

Mahtomedi Corporation is considering investing in specialized equipment costing $240,000.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:

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

Quizplus · Accepted Answer

To calculate the accounting rate of return, we need to divide the average annual net income by the initial investment:

Average Annual Net Income = (Total Net Income / Useful Life) = (97000 / 5) = $19,400

Initial Investment = $240,000

Accounting Rate of Return = (Average Annual Net Income / Initial Investment) x 100
= (19,400 / 240,000) x 100
= 8.0833%

Therefore, the accounting rate of return on the investment is 8.08%, which is closest to 8.75%. Hence, Option B is correct.

Mahtomedi Corporation Is Considering Investing in Specialized Equipment Costing $240,000