Aqua Shop is considering the purchase of a used printing press costing $15,000.The printing press would generate a net cash inflow of $6,000 per year for four years.At the end of four years, the press would have no salvage value.The company's cost of capital is 12%.The company uses straight-line depreciation with no mid-year convention.
What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

Question

Aqua Shop is considering the purchase of a used printing press costing $15,000.The printing press would generate a net cash inflow of $6,000 per year for four years.At the end of four years, the press would have no salvage value.The company's cost of capital is 12%.The company uses straight-line depreciation with no mid-year convention. 
What is the accounting rate of return on the original investment in the press to the nearest percent, assuming no taxes are paid?

Quizplus · Accepted Answer

Accounting rate of return = (Average income - Depreciation*) ÷ Initial investment
*Depreciation = Initial investment ÷ Life of the machine = $15,000 / 4 = $3,750
 
Accounting rate of return = [$6,000 - $3,750)] / $15,000 = 0.15 or 15%

Aqua Shop Is Considering the Purchase of a Used Printing