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21 August, 20:25

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%.

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Answers (1)
  1. 21 August, 20:53
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    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%
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