Ostead Company
Ostead Company is considering an investment with the following data:
Initial cost $200,000
Annual net cash inflows $ 25,000
Expected life 10 years
Salvage value none
Depreciation will be taken on a straight-line basis over the expected life of the investment.The company requires a minimum rate of return of 4%. The present value of an annuity of $1 in arrears for 4% for 10 years is as follows: $$\begin{array} { l l l l l l l l l l l }
\text { Period } & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 \
4 \% & 0.962 & 1.886 & 2.775 & 3.630 & 4.452 & 5.242 & 6.002 & 6.773 & 7.435 & 8.111
\end{array}$$
-Refer to Ostead Company. What is the accounting rate of return for the investment?

Question

Ostead Company
Ostead Company is considering an investment with the following data:
Initial cost $200,000
Annual net cash inflows $ 25,000
Expected life 10 years
Salvage value none
Depreciation will be taken on a straight-line basis over the expected life of the investment.The company requires a minimum rate of return of 4%. The present value of an annuity of $1 in arrears for 4% for 10 years is as follows: $$\begin{array} { l l l l l l l l l l l } 
\text { Period } & 1 & 2 & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 \
4 \% & 0.962 & 1.886 & 2.775 & 3.630 & 4.452 & 5.242 & 6.002 & 6.773 & 7.435 & 8.111
\end{array}$$
-Refer to Ostead Company. What is the accounting rate of return for the investment?

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual net income by the initial cost of the investment. The average annual net income is $25,000, and the initial cost of the investment is $200,000. Therefore, the accounting rate of return is 25,000 / 200,000 = 12.5%.

Ostead Company Ostead Company Is Considering an Investment with the Following

Ostead Company
Ostead Company Is Considering an Investment with the Following