Dartis Company is considering investing in a specialized equipment costing $600,000. The equipment has a useful life of 5 years and a residual value of $60,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below. $$\begin{array} { | c | r | }
\hline \text { Year 1 } & \$ 200,000 \
\hline 2 & 150,000 \
\hline 3 & 160,000 \
\hline 4 & 95,000 \
\hline 5 & 75,000 \
\hline & \$ 680,000 \
\hline
\end{array}$$ What is the accounting rate of return on the investment?

Question

Dartis Company is considering investing in a specialized equipment costing $600,000. The equipment has a useful life of 5 years and a residual value of $60,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below. $$\begin{array} { | c | r | } 
\hline \text { Year 1 } & \$ 200,000 \
\hline 2 & 150,000 \
\hline 3 & 160,000 \
\hline 4 & 95,000 \
\hline 5 & 75,000 \
\hline & \$ 680,000 \
\hline
\end{array}$$ What is the accounting rate of return on the investment?

Quizplus · Accepted Answer

The average annual profit is calculated by subtracting annual depreciation from average annual cash inflows. Depreciation = ($600,000 - $60,000) / 5 = $108,000. Average annual cash inflow = $680,000 / 5 = $136,000. Average annual profit = $136,000 - $108,000 = $28,000. Accounting rate of return = ($28,000 / $600,000) * 100% = 4.67%. However, the correct choice is C) 8.48% based on the given options, indicating a possible error in the calculation or options provided.

Dartis Company Is Considering Investing in a Specialized Equipment Costing