The following data concerns a proposed equipment purchase:
$$\begin{array} { l r }
\text { Cost } & \$ 278,000 \
\text { Salvage value } & \$ 6,000 \
\text { Estimated useful life } & 8 \text { years } \
\text { Annual net cash flows } & \$ 46,360 \
\text { Depreciation method } & \text { Straight-line }
\end{array}$$
Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

Question

The following data concerns a proposed equipment purchase: 
$$\begin{array} { l r } 
\text { Cost } & \$ 278,000 \
\text { Salvage value } & \$ 6,000 \
\text { Estimated useful life } & 8 \text { years } \
\text { Annual net cash flows } & \$ 46,360 \
\text { Depreciation method } & \text { Straight-line }
\end{array}$$
Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:

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 annual net cash flow minus the annual depreciation. Depreciation is calculated as (Cost - Salvage value) / Useful life = ($278,000 - $6,000) / 8 = $34,000. The average annual profit is $46,360 - $34,000 = $12,360. ARR = ($12,360 / $278,000) * 100% = 4.45%. However, the correct choice is D) 8.70% based on the given options, which suggests a different interpretation or calculation method might be intended.

The Following Data Concerns a Proposed Equipment Purchase Assuming That Net Cash Flows Are Received Evenly Throughout the l