Question

addison corporation is considering the purchase of a new piece of equipment. the equipment will have an initial cost of $693,000 and a 3-year useful life with no salvage value. if the accounting rate of return for the project is 6%, what is the annual increase in net cash flow? multiple choice $41,580 $189,420 $231,000 $272,580

Answer 1

The annual increase in net cash flow required to achieve an accounting rate of return of 6% on the new equipment is $41,580.

Step-by-step explanation:

The student is asking about the calculation of the annual increase in net cash flow required to achieve a specific accounting rate of return (ARR) on a piece of equipment. To find the annual increase in net cash flow given the ARR, initial cost of the equipment, and its useful life, the formula is:

ARR = (Annual Increase in Net Cash Flow) / Initial Investment

To solve for the Annual Increase in Net Cash Flow, rearrange the formula:

Annual Increase in Net Cash Flow = ARR × Initial Investment

Plug in the given values:

Annual Increase in Net Cash Flow = 0.06 × $693,000

Annual Increase in Net Cash Flow = $41,580

This is the annual net cash flow needed to achieve an ARR of 6% on the new equipment with no salvage value after a 3-year useful life.