Calculator Osler Company is considering an investment with the following dа ta: Initial cost $200,000 Annual net cash inflows $25,000 Expected life 10 years Salvage value none Depreciation will be taken on a straight-line basis over the expected life of the investment. What is the accounting rate of return for the investment?

a. 20%

b. 25%

c. 10%

d. 12.5%

e. 2.5%

e. 2.5%

Explanation:

Accounting rate of return; ARR = [Average net cashflows / initial investment] * 100

Average net cashflows = $25,000 - depreciation per year

depreciation = (initial cost - salvage) useful life = ($200,000-0) / 10 = $20,000

Therefore, Average net cashflows = $25,000 - $20,000 = $5,000

Initial investment = $200,000

ARR = (5,000 / 200,000) * 100

ARR = 0.025 * 100

ARR = 2.5%