Seattle, Inc., is contemplating a project that costs $180,000. Expectations are that annual cash revenues will be $70,000 and annual expenses (including depreciation) will total $30,000. The project has a six-year useful life and a residual value of $30,000. Assume Seattle Inc. uses straight line method of depreciation. The accounting rate of return for the project is

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The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The annual profit is the annual cash revenue minus annual expenses, excluding depreciation. Depreciation is calculated as (Cost - Residual Value) / Useful Life = ($180,000 - $30,000) / 6 = $25,000. Annual profit = $70,000 - ($30,000 - $25,000) = $65,000. ARR = $65,000 / $180,000 = 36.1 percent. However, the correct choice closest to this calculation is 38.1 percent.