Sawyer & Cecil, Computer Consultants, is considering an investment in computer and network equipment costing $254,000. This equipment would allow them to offer new programming services to clients. The equipment will be depreciated on the straight-line basis over an eight-year period with an estimated residual value of $60,000. Using the accounting rate of return model, what is the minimum average annual operating income that must be generated from this investment in order to achieve a 12% accounting rate of return?

Question

Quizplus · Accepted Answer

First, we need to calculate the annual depreciation expense:

Total cost - Residual value = Depreciable cost
$254,000 - $60,000 = $194,000

Depreciable cost / Useful life = Annual depreciation
$194,000 / 8 years = $24,250 per year

Next, we can calculate the average annual operating income using the accounting rate of return formula:

Average annual operating income = Annual depreciation + Residual value / 2 / Accounting rate of return

Average annual operating income = ($24,250 + $60,000/2) / 0.12 = $30,480

Therefore, the minimum average annual operating income that must be generated from this investment in order to achieve a 12% accounting rate of return is $30,480, which is option C.

Sawyer & Cecil, Computer Consultants, Is Considering an Investment in Computer