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Eva8 [605]
3 years ago
11

Nelson Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an ann

ual increase in cash flow of $170,250. The equipment will have an initial cost of $540,000 and have a 5 year life. If the salvage value of the equipment is estimated to be $195,000, what is the accounting rate of return?
Business
1 answer:
Irina18 [472]3 years ago
3 0

Answer:

the accounting rate of return is 18.75%

Explanation:

The computation of the accounting rate of return is as follows:

But before that following things need to be determined

Depreciation expense is

= ($540,000 - $195,000 )÷ (5 years)

= $69000

The Net income is

=  $170,250 - $69,000

= $101,250

Now the accounting rate of return is

= Net income ÷ Initial investment

= $101,250 ÷ $540,000

= 18.75%

hence, the accounting rate of return is 18.75%

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