Dartis Company is considering investing in a specialised equipment costing $650,000.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.
$\begin{array}{|l|l|}
\hline \text { Year } 1& \$ 202,000 \
\hline 2&157,000 \
\hline 3&169,000 \
\hline 4&102,000 \
\hline 5&140,000 \
\hline &\$ 770,000\
\hline
\end{array}$
What is the accounting rate of return on the investment?

Question

Dartis Company is considering investing in a specialised equipment costing $650,000.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.
$\begin{array}{|l|l|}
\hline \text { Year } 1& \$ 202,000 \
\hline 2&157,000 \
\hline 3&169,000 \
\hline 4&102,000 \
\hline 5&140,000 \
\hline &\$ 770,000\
\hline 
\end{array}$
What is the accounting rate of return on the investment?

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. First, calculate the total depreciation: ($650,000 - $60,000) / 5 = $118,000 per year. Then, calculate the total profit over 5 years: $770,000 - (5 * $118,000) = $180,000. The average annual profit is $180,000 / 5 = $36,000. Finally, ARR = ($36,000 / $650,000) * 100 = 5.54%. However, the correct calculation should consider the average investment, which is ($650,000 + $60,000) / 2 = $355,000. ARR = ($36,000 / $355,000) * 100 = 10.14%.

Dartis Company Is Considering Investing in a Specialised Equipment Costing