Buckhead Shop is considering the purchase of a used printing press costing $19,200.The printing press would generate a net cash inflow of $8,000 per year for five years.At the end of three years,the press would have no salvage value.The company's cost of capital is 10%.The company uses straight-line depreciation with no mid-year convention. Assume no taxes are paid.What would be the accounting rate of return on the original investment in the press to the nearest percent?

Question

Quizplus · Accepted Answer

First, we need to calculate the average annual net income from the printing press:

Net cash inflow per year = $8,000

Depreciation per year = $19,200 / 5 = $3,840

Net income per year = $8,000 - $3,840 = $4,160

The average annual net income is ($4,160 x 3) / 5 = $2,496

Now we can use the accounting rate of return formula:

ARR = Average annual net income / Initial investment x 100%

ARR = $2,496 / $19,200 x 100% = 13.00%

Therefore, the accounting rate of return on the original investment in the press is approximately 21.67%.

Buckhead Shop Is Considering the Purchase of a Used Printing