Stump 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? (Do not round intermediate computations. Round final answer to one decimal place.)

Question

Quizplus · Accepted Answer

The average annual income for the next three years can be found by taking the average of the three years’ income:

Average annual income = (155708 + 159312 + 161112) / 3 = 158377.3

The average book value of equipment over the three years is given as:
Average book value = 251575

Using these values with the formula for ARR:

ARR = Average annual income / Average book value

ARR = 158377.3 / 251575 = 0.629 or 62.9%

Therefore, the best choice is C.