Henkle Company is considering a project with an initial investment of $626,500 in new equipment that will yield annual net cash flows of $90,000 and will be depreciated at $55,000 per year over its nine-year life.What is the accounting rate of return?

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual net income by the average investment. The average annual net income is $90,000 - $55,000 = $35,000. The average investment is ($626,500 + $0) / 2 = $313,250. Therefore, the accounting rate of return is $35,000 / $313,250 = 5.59%.

Henkle Company Is Considering a Project with an Initial Investment