Martin Brother is considering investing $20,000 in a project with the following cash revenues and expenses:
$\begin{array}{lll}&&\text { Cash Expenses \& }\&\text { Revenues }&\text { Depreciation }\
\text { Year 1 } & \$ 8,000 & \$ 8,000 \
\text { Year 2 } & \$ 12,000 & \$ 8,000 \
\text { Year 3 } & \$ 15,000 & \$ 9,000 \
\text { Year 4 } & \$ 20,000 & \$ 10,000 \
\text { Year 5 } & \$ 20,000 & \$ 10,000
\end{array}$
-Refer to the Figure.What is the accounting rate of return for the project?

Question

Martin Brother is considering investing $20,000 in a project with the following cash revenues and expenses:
 $\begin{array}{lll}&&\text { Cash Expenses \& }\&\text { Revenues }&\text { Depreciation }\
\text { Year 1 } & \$ 8,000 & \$ 8,000 \
\text { Year 2 } & \$ 12,000 & \$ 8,000 \
\text { Year 3 } & \$ 15,000 & \$ 9,000 \
\text { Year 4 } & \$ 20,000 & \$ 10,000 \
\text { Year 5 } & \$ 20,000 & \$ 10,000
\end{array}$
-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 determined by subtracting the annual depreciation from the cash revenues for each year, summing these values, and then dividing by the number of years. The calculation is as follows:Year 1 profit: $8,000 - $8,000 = $0Year 2 profit: $12,000 - $8,000 = $4,000Year 3 profit: $15,000 - $9,000 = $6,000Year 4 profit: $20,000 - $10,000 = $10,000Year 5 profit: $20,000 - $10,000 = $10,000Total profit over 5 years = $0 + $4,000 + $6,000 + $10,000 + $10,000 = $30,000Average annual profit = $30,000 / 5 = $6,000ARR = (Average annual profit / Initial investment) * 100 = ($6,000 / $20,000) * 100 = 30%

Martin Brother Is Considering Investing $20,000 in a Project with the Following