Question

Project A requires a $415,000 initial investment for new machinery with a five-year life and a salvage value of $37,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $22,500 per year for the next five years. Compute Project A’s accounting rate of return.

Answer 1

9.96%

Step-by-step explanation:

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

= Annual net income ÷ average investment

where,

Annual net income is $22,500

And, the average investment would be

= (Initial investment + salvage value) ÷ 2

= ($415,000 + $37,000) ÷ 2

= $452,000 ÷ 2

= $226,000

Now put these values to the above formula

So, the rate would equal to

= $22,500 ÷ $226,000

= 9.96%