Question

An investment of $10,000 provides average net cash flows of $500 with zero salvage value. Depreciation is $15 per year. Calculate the accounting rate of return using the original investment. (Note: Round the answer to two decimal places.)

a. 5.19%
b. 3.41%
c. 4.85%
d. 6.47%
e. 3.29%

Answer 1

option (c) 4.85%

Step-by-step explanation:

Data provided in the question:

Average net cash flows = $500

Salvage value = 0

Depreciation = $15 per year

Original Investment = $10,000

Now,

Accounting rate of return

= [ Net cash flow - Depreciation] ÷ ( Original Investment )

= [ $500 - $15 ] ÷ $10,000

= 0.0485

or

= 0.0485 × 100%

= 4.85%

Hence,

the answer is option (c) 4.85%