Monterey Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey's average investment?
A) $6,000.
B) $7,000.
C) $18,000.
D) $21,000.
E) $36,000.

Question

Quizplus · Accepted Answer

To calculate the average investment, we need to divide the total investment over the life of the machine by the number of years. The total investment is the cost of the machine, which is $36,000. The number of years is the useful life of the machine, which is 6 years.

Average investment = Total Investment / Number of Years 
= $36,000 / 6 
= $6,000 per year

Therefore, the answer is (C) $18,000, which is Monterey Corporation's average investment in the machine.

Monterey Corporation Is Considering the Purchase of a Machine Costing