Question

Flint Systems is considering investing in​ production-management software that costs​ $630,000, has​ $67,000 residual​ value, and leads to cost savings of​ $1,650,000 per year over its​ five-year life. Calculate the average amount invested in the asset that should be used for calculating the accounting rate of return.

Answer 1

The average amount invested in the asset that should be used for calculating the accounting rate of return is $348,500

Step-by-step explanation:

For computing the average amount invested in the assets, following equation should be used which is shown below:

= (Production management cost + Residual value) ÷ 2

= ($630,000 + $67,000) ÷ 2

= $697,000 ÷ 2

= $348,500

In this the question has asked to compute the average so the amount should be divided by 2.

The cost saving should be irrelevant in the computation part because this is used in computing accounting rate of return. Thus, it is not been considered.

Hence, the the average amount invested in the asset that should be used for calculating the accounting rate of return is $348,500