Question

palmer corporation is considering the purchase of a new piece of equipment. the cost savings from the equipment would result in an annual increase in net operating income of $141,750. the equipment will have an initial cost of $525,000 and a 7-year useful life. if the salvage value of the equipment is estimated to be $14,000, what is the accounting rate of return? multiple choice 44.11% 149.37% 16.28% 27.00%

Answer 1

The accounting rate of return for the new equipment is approximately 27.7%.

The accounting rate of return is a financial metric used to evaluate the profitability of an investment.

It is calculated by dividing the average annual net operating income by the initial investment cost and expressing it as a percentage.

In this case, the average annual net operating income is $141,750 and the initial cost of the equipment is $525,000.

The salvage value of the equipment is $14,000.

Using these values, we can calculate the accounting rate of return as follows:

Accounting Rate of Return = (Annual Net Operating Income / Initial Investment Cost) x 100

Accounting Rate of Return = ($141,750 / ($525,000 - $14,000)) x 100

Accounting Rate of Return = ($141,750 / $511,000) x 100

Accounting Rate of Return ≈ 27.7%