Question

Walden Industries 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

$348,500

Step-by-step explanation:

The average amount invested or average investment is calculated by adding the initial investment plus the residual value, and then divide the result by 2:

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

average amount invested = ($630,000 + $67,000 ) / 2 = $697,000 / 2 = $348,500