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11 May, 07:59

Assume straight-line depreciation. A company plans to purchase machinery costing $1,000,000 with salvage value of $200,000 after 4 years. After-tax net income is expected to be $55,000, $40,000, $35,000, and $30,000 during the 4 years. Calculate the accounting rate of return. Round your answer to the nearest tenth of a percent.

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  1. 11 May, 08:01
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    Accounting rate of return = 6.67%

    Explanation:

    The accounting rate of return (ARR) is the proportion of the average investment that is earned as profit.

    ARR = average operating income / Average investment

    Average income = (55,000 + 40,000 + 35,000 + 30,000) / 4=40,000

    Average investment = initial cost + salvage value/2

    = 1,000,000 + 200,000/2 = 600,000

    ARR = 40,000/600,000 * 100 = 6.67

    Accounting rate of return = 6.67%
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