Question

An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,500 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life

Answer 1

Answer:

Rate of return= 11.25%

Explanation:

The accounting rate of return is the average annual income expressed as a percentage of the average investment.  

The simple rate of return can be calculated using the two formula below:  

Accounting rate of return  

= Annual operating income/Average investment × 100  

Average investment = (Initial cost + scrap value)/2  

Average annual income = Total income over investment period / Number of years

Average investment = (60,000 + 20,000)/2= $40,000

Average annual income is already given as  = 4,500

Rate of return = 4500/40,0000 × 100 = 50%

Rate of return= 11.25%