Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of eight years with no expected salvage value. The expected cash flows associated with the project are as follows:
$\begin{array}{lll}&\text { Cash } & \text { Cash Expenses \& } \
\text { Year } &\text { Revenues }&\text { Depreciation }\
1 & \$ 2,400,000 & \$ 1,900,000 \
2 & \$ 2,400,000 & \$ 1,900,000 \
3 & \$ 2,400,000 & \$ 1,900,000 \
5 & \$ 2,400,000 & \$ 1,900,000 \
6 & \$ 2,400,000 & \$ 1,900,000 \
7 & \$ 2,400,000 & \$ 1,900,000 \
8 & \$ 2,400,000 & \$ 1,900,000 \
& \$ 2,400,000 & \$ 1,900,000
\end{array}$
-Refer to the Figure.What is the accounting rate of return for the project?

Question

Darth Company is considering the purchase of new heavy construction equipment that will cost $2,000,000 and have a life of eight years with no expected salvage value. The expected cash flows associated with the project are as follows:
 $\begin{array}{lll}&\text { Cash } & \text { Cash Expenses \& } \
\text { Year } &\text { Revenues }&\text { Depreciation }\
1 & \$ 2,400,000 & \$ 1,900,000 \
2 & \$ 2,400,000 & \$ 1,900,000 \
3 & \$ 2,400,000 & \$ 1,900,000 \
5 & \$ 2,400,000 & \$ 1,900,000 \
6 & \$ 2,400,000 & \$ 1,900,000 \
7 & \$ 2,400,000 & \$ 1,900,000 \
8 & \$ 2,400,000 & \$ 1,900,000 \
& \$ 2,400,000 & \$ 1,900,000
\end{array}$
-Refer to the Figure.What is the accounting rate of return for the project?

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The average annual profit is the difference between average annual revenues and expenses, including depreciation. Here, average annual profit is $(\$2,400,000 - \$1,900,000) = \$500,000$. ARR = $\frac{\$500,000}{\$2,000,000} \times 100 = 25.000\%$.

Darth Company Is Considering the Purchase of New Heavy Construction