Walden Industries is considering investing in production-management software that costs $630,000,has $67,000 residual value,and leads to cost savings of $1,650,000 per year over its five-year life.Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.

Question

Quizplus · Accepted Answer

To calculate the accounting rate of return, we need to know the average annual income or savings generated by the investment and divide that by the average amount invested in the asset.

Average amount invested = (Initial investment + Residual value)/2 
= ($630,000 + $67,000)/2 
= $348,500

Therefore, the best choice is C) $348,500.

Walden Industries Is Considering Investing in Production-Management Software That Costs