Henkle Company is considering a project with an initial investment of $626,500 in new equipment that will yield annual net cash flows of $90,000 and will be depreciated at $55,000 per year over its nine-year life. What is the accounting rate of return on the investment?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The average annual profit is the annual net cash flow minus the annual depreciation: $90,000 - $55,000 = $35,000. ARR = ($35,000 / $626,500) * 100 = 5.59%.

Henkle Company Is Considering a Project with an Initial Investment