The following data concerns a proposed equipment purchase: 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:  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 is calculated by dividing the average annual operating income by the initial investment.

Average annual operating income = (Total annual operating income over the life of the equipment) / (Life of the equipment)

Total annual operating income = Annual revenue - Annual expenses
Annual revenue = $700,000
Annual expenses = $300,000 + $200,000 + $150,000 = $650,000
Total annual operating income = $50,000

Life of the equipment = 5 years

Average annual operating income = $50,000 / 5 = $10,000

Initial investment = $50,000

Accounting rate of return = ($10,000 / $50,000) x 100% = 20%

Therefore, the correct choice is C (15.0%).

The Following Data Concerns a Proposed Equipment Purchase: Assuming