Question

Jones Company is considering investing in a new piece of equipment that costs $600,000 and has a $100,000 residual value. The new equipment should provide a cost savings of $50,000 per year over its five-year life. In calculating ARR, what is the average amount invested in the asset (denominator)?

Answer 1

average amount invested is $350000

Step-by-step explanation:

Given data

amount invested = $600000

residual value = $100000

cost saving = $50000

to find out

average amount invested

solution

we will calculate here average amount invested by given formula that is

average amount invested = (amount invested + residual value) / 2 .......1

put all these value we get by equation 1

average amount invested = $600000 + $100000) / 2

average amount invested = $700000 / 2

average amount invested is $350000