Carmel Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Carmel's average investment?

Question

Quizplus · Accepted Answer

The average investment is calculated as the initial investment plus salvage value divided by 2. Since there is no salvage value, the average investment is simply the initial investment divided by 2. In this case, the initial investment is $36,000, so the average investment is $18,000.

Carmel Corporation Is Considering the Purchase of a Machine Costing