Morrow Company has invested in equipment that cost $70,000.The equipment has a 7-year life and no salvage value.Morrow uses straight-line depreciation.The equipment has a payback period of 4 years.The accounting rate of return is closest to

Question

Quizplus · Accepted Answer

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

The initial investment is $70,000, and the payback period is 4 years, so the average annual income is:

Average Annual Income = Initial Investment / Payback Period
Average Annual Income = $70,000 / 4
Average Annual Income = $17,500

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

Accounting Rate of Return = Average Annual Income / Initial Investment
Accounting Rate of Return = $17,500 / $70,000
Accounting Rate of Return = 0.25 or 25%

Therefore, the closest answer is option B) 10.7%.

Morrow Company Has Invested in Equipment That Cost $70,000