Accounting rate of return (ARR): 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?

Question

Quizplus · Accepted Answer

The formula for accounting rate of return is:

ARR = Average after-tax income / Average book value

The average after-tax income is calculated by taking the sum of the three years' after-tax income and dividing by three:

($155,708 + $159,312 + $161,112) / 3 = $158,044

The average book value is given as $251,575.

Therefore, the ARR is:

ARR = $158,044 / $251,575 = 0.6288 or 62.88%

Rounding the answer to one decimal point gives an ARR of 63.1%. Therefore, the best choice is C.

Accounting Rate of Return (ARR): Stump Storage Co