Randy Ritchie
Randy Ritchie is considering investing $20,000 in a project with the following annual cash revenues and expenses: $\begin{array}{lll}&\text { Cash } & \text { Cash } \
&\text { Revenues } & \text { Expenses }\
\text { Year 1 } & \$ 8,000 & \$ 8,000 \
\text { Year 2 } & \$ 12,000 & \$ 8,000 \
\text { Year 3 } & \$ 15,000 & \$ 9,000 \
\text { Year 4 } & \$ 20,000 & \$ 10,000 \
\text { Year 5 } & \$ 20,000 & \$ 10,000
\end{array}$ Depreciation will be $4,000 per year.
-Refer to Randy Ritchie. What is the accounting rate of return on the investment?

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual accounting income by the initial investment. The average annual accounting income is calculated by adding up the annual accounting incomes and dividing by the number of years. The annual accounting income is calculated by subtracting the annual cash expenses and depreciation from the annual cash revenues. The initial investment is $20,000.The average annual accounting income is ($8,000 + $12,000 + $15,000 + $20,000 + $20,000) / 5 = $15,000. The accounting rate of return is $15,000 / $20,000 = 10%.

Randy Ritchie Randy Ritchie Is Considering Investing $20,000 in a Project

Randy Ritchie
Randy Ritchie Is Considering Investing $20,000 in a Project