Question

assume straight line depreciation & even cash flows. A company plans to purchase equipment for $25,000. The equipment will have $0 salvage value & increase after-tax income by $7,500 annually during its 5-year life. The accounting rate of return is

Answer 1

it's 60% not 10%

Step-by-step explanation:

Answer 2

Answer: 10%-ARR

Explanation:ARR- Accounting Rate of Return is used to make capital budgeting decisions and it can be calculated thus:

1- calculate the deprecation expenses = cost/useful life

= 25,000/5=5,000

2. calculate average annual profit = after tax income- expenses

= 7,500-5000(depreciation)=2,500

3. Calculate the ARR = Av annual profit / cost

= 2,500 / 25000

= 0.1

=10%