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29 January, 15:02

Copa Cabana Corporation is considering the purchase of a new machine costing $30,000. The machine would generate net cash inflows of $12,000 per year for 5 years. At the end of 5 years, the machine would have no salvage value. Copa Cabana's cost of capital is 12 percent. Copa Cabana uses straight-line depreciation. The investment's accounting rate of return on initial investment is: Select one: A. 10.27 percent B. 12.28 percent C. 20.00 percent D. 30.55 percent

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  1. 29 January, 15:26
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    C. 20.00 percent

    Explanation:

    The computation of the accounting rate of return is shown below:

    The formula to compute the accounting rate of return is shown below:

    = Annual net income : initial investment

    where,

    Annual net income is

    = Net cash flows - depreciation expense

    = $12,000 - $6,000

    = $6,000

    And, the initial investment is $30,000

    So, the accounting rate of return on initial investment is

    = $6,000 : $30,000

    = 20%

    The depreciation expense is

    = $30,000 : 5 years

    = $6,000
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