Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\&\text { Revenues }&\text { Depreciation }\
\text { Year 1 } & \$ 10,000 & \$ 12,000 \
\text { Year 2 } & \$ 12,000 & \$ 11,000 \
\text { Year 3 } & \$ 15,000 & \$ 12,000 \
\text { Year 4 } & \$ 20,000 & \$ 12,000 \
\text { Year 5 } & \$ 22,000 & \$ 12,000 \
\text { Year 6 } & \$ 25,000 & \$ 15,000 \
\text { Year 7 } & \$ 25,000 & \$ 15,000 \
\text { Year 8 } & \$ 25,000 & \$ 15,000
\end{array}$
-Refer to the Figure.What is the accounting rate of return for the project?

Question

Cary Swenson is considering investing $30,000 in a project with the following cash revenues and expenses:
 $\begin{array}{lll}&&\text { Cash Expenses \& }\&\text { Revenues }&\text { Depreciation }\
\text { Year 1 } & \$ 10,000 & \$ 12,000 \
\text { Year 2 } & \$ 12,000 & \$ 11,000 \
\text { Year 3 } & \$ 15,000 & \$ 12,000 \
\text { Year 4 } & \$ 20,000 & \$ 12,000 \
\text { Year 5 } & \$ 22,000 & \$ 12,000 \
\text { Year 6 } & \$ 25,000 & \$ 15,000 \
\text { Year 7 } & \$ 25,000 & \$ 15,000 \
\text { Year 8 } & \$ 25,000 & \$ 15,000
\end{array}$
-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 total cash revenues minus total cash expenses, including depreciation, divided by the number of years. The total cash revenues over 8 years are $154,000, and the total cash expenses including depreciation are $99,000, leaving a profit of $55,000 over 8 years. The average annual profit is $55,000 / 8 = $6,875. The initial investment is $30,000. Thus, ARR = ($6,875 / $30,000) * 100 = 22.92%. However, this calculation does not match any of the provided options, suggesting a misunderstanding in the approach based on the options given. The correct approach should consider the net operating income (cash revenues - cash expenses, excluding depreciation) and the average investment (initial investment + salvage value / 2, assuming salvage value is $0 here). However, without clear instructions to calculate based on net operating income or another specific method, and given the options, there might be a need to re-evaluate the calculation or the understanding of the question's requirements.

Cary Swenson Is Considering Investing $30,000 in a Project with the Following