Question

The following data concerns a proposed equipment purchase: Cost $144,000 Salvage value $4,000 Estimated useful life 4 years Annual net cash flows $46,100 Depreciation method Straight-line Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:
a. 7.7%.
b. 15.0%.
c. 5.0%.
d. 62.3%.
e. 32.0%.

Answer 1

Answer:

Option (B) is correct

Explanation:

Depreciation expense:

= (cost - salvage value) ÷ estimated useful life

= ($144,000 - $4,000) ÷ 4

= $35,000

Average investment:

= (cost + salvage value) ÷ 2

= ($144,000 + $4,000) ÷ 2

= $74,000

Net income:

= Annual net cash flows - Depreciation expense

= $46,100 - $35,000

= $11,100

Accounting rate of return:

= (Net Income ÷ Average investment) × 100

= ($11,100 ÷ $74,000) × 100

= 15%