Accounting Rate of Return (ARR):
ARR is calculated by dividing the average annual net income generated by the initial investment and expressing it as a percentage.
Step 1: Calculate the average annual net income generated.
Average annual net income = Total increase in net income over the useful life / Useful life
Average annual net income = $45,864 / 5
Average annual net income ≈ $9,172.8
Step 2: Calculate the ARR.
ARR = (Average annual net income / Initial investment) x 100
ARR = ($9,172.8 / $252,000) x 100 ≈ 3.64%
Payback Period:
The payback period is the time it takes for the initial investment to be recovered from the net cash flows.
Step 1: Calculate the annual net cash flows.
Annual net cash flows = Annual net income generated - Annual depreciation expense
Annual net cash flows = $45,864 - ($252,000 - $92,000) / 5
Annual net cash flows = $45,864 - $32,000 = $13,864
Step 2: Calculate the payback period.
Payback period = Initial investment / Annual net cash flows
Payback period = $252,000 / $13,864 ≈ 18.17 years
Note: Since the payback period is greater than the useful life of the investment (5 years), it will not be fully recovered within the useful life. Therefore, the payback period is not a suitable measure in this case.