Use the information below to answer the following question(s).
Boyle Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:

-Mahtomedi Corporation is considering investing in specialized equipment costing $240,000. The equipment has a useful life of 5 years and a residual value of $20,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are:
Mahtomedi Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

Question

Use the information below to answer the following question(s).
Boyle Company is evaluating two possible investments in depreciable plant assets. The company uses the straight-line method of depreciation. The following information is available:
 
-Mahtomedi Corporation is considering investing in specialized equipment costing $240,000. The equipment has a useful life of 5 years and a residual value of $20,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are: 
 Mahtomedi Corporation's required rate of return on investments is 14%.
What is the accounting rate of return on the investment?

Quizplus · Accepted Answer

B) (Annual net cash flow - depreciation)/Investment = Accounting rate of return
($325,000/5 - (240,000 - 20,000)/5)/240,000
($65,000 - 44,000)/240,000 = 8.75%

Use the Information Below to Answer the Following Question(s)