Question

Chilly Company is considering investing $110,000 in a new refrigerator, designed to keep food extra crispy. The refrigerator will have a useful life of 10 years, a salvage value of $10,000, and is expected to generate an annual after tax net income of $15,000 in each year of its useful life. Chilly will use the straight-line method of depreciation. What is the accounting rate of return

Answer 1

Answer:

25%

Explanation:

depreciation expense per year = ($110,000 - $10,000) / 10 = $10,000

average annual investment = $60,000 (carrying value after the end of year 5 or half the life of the project)

average net profit per year = $15,000

accounting rate of return = average net profit per year / average investment = $15,000 / $60,000 = 0.25 = 25%