Accounting rate of return (ARR): Wattle Storage Co. is expecting to generate after-tax income of $155,708, $159,312, and $161,112 for each of the next three years. The equipment used will have an average book value of $251,575 over that period. What is the ARR?

Question

Quizplus · Accepted Answer

ARR is calculated by dividing the average annual after-tax income by the average book value of the asset.

Average annual after-tax income = (155,708 + 159,312 + 161,112) / 3 = 158,044

Average book value of the asset = 251,575

ARR = 158,044 / 251,575 = 0.6289 or 62.89%

Rounding off to one decimal place, the ARR is 63.1%, which is closest to option C.

Accounting Rate of Return (ARR): Wattle Storage Co