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 The annual average investment amount used to calculate the accounting rate of return is:
a.$72,000
b.$70,000
c.$37,000
d.$74,000
e.$48,950

Answer 1

Answer:

d.$74,000

Explanation:

The annual average investment is given by the average of the initial investment (144,000) and the scrap value (salvage value = 4,000)

The average investment amount is:

$AAI = \frac{144,000+4,000}{2}\\ AAAI = \ 74,000$

The annual average investment amount used to calculate the accounting rate of return is: d.$74,000