Question

Tawney Company is considering investing in a new piece of equipment that costs $700,000 and has a $200,000 residual value. The new equipment should provide a cost savings of $60,000 per year over its five-year life. In calculating ARR, what is the average amount invested in the asset (denominator)?

Answer 1

average amount invested in the asset = $450,000

Step-by-step explanation:

given data

equipment costs = $700,000

residual value = $200,000

cost savings = $60,000

to find out

average amount invested in the asset

solution

we get here Average amount invested that is express as

average amount invested in the asset = ( Amount invested + Residual value) ÷ 2 ........................1

put here value we get

average amount invested in the asset =
`($700000+$200000)/(2)`

average amount invested in the asset = $450,000