Question

Prescott Corporation is considering an investment in new equipment costing $918,000. The equipment will be depreciated on a straight−line basis over a ten−year life and is expected to have a residual value of $90,000. The equipment is expected to generate net cash inflows of $146,000 for each of the first five years and $114,000 for each of the last five years. What is the accounting rate of return associated with the equipment​ investment? (Round your answer to two decimal​ places.)

Answer 1

The accounting rate of return (ARR) is a financial ratio used to measure the profitability of an investment. In this case, the ARR for the equipment investment is 10.30%.

Step-by-step explanation:

The accounting rate of return (ARR) is a financial ratio used to measure the profitability of an investment.

To calculate the ARR, you need to divide the average annual net cash inflow by the initial investment cost and express it as a percentage.

In this case, the initial investment cost is $918,000, and the net cash inflows are $146,000 for the first five years and $114,000 for the last five years.

To calculate the ARR, find the average annual net cash inflow by summing the net cash inflows for each period and dividing by the total number of periods. Then divide the average annual net cash inflow by the initial investment cost and multiply by 100 to get the percentage. Finally, round the answer to two decimal places. The calculation would be:

((($146,000 x 5) + ($114,000 x 5)) / 10) / $918,000 x 100 = ARR%

Plugging in the numbers:

((($146,000 x 5) + ($114,000 x 5)) / 10) / $918,000 x 100 = 10.30%

Therefore, the accounting rate of return associated with the equipment investment is 10.30%.

Answer 2

The accounting rate of return associated with the equipment investment is 14.17%.

Step-by-step explanation:

The accounting rate of return (ARR) is a financial metric used to measure the profitability of an investment. To calculate the ARR, you need to divide the average annual profit generated by the investment by the initial cost of the investment. In this case, the net cash inflows for the first five years are $146,000 per year, and for the last five years, they are $114,000 per year. The average annual profit can be calculated as follows:

(($146,000 * 5) + ($114,000 * 5)) / 10 = $130,000

The ARR can then be calculated as:

$130,000 / $918,000 = 0.1417 (rounded to four decimal places)

To express this as a percentage, multiply by 100:

0.1417 * 100 = 14.17%

Therefore, the accounting rate of return associated with the equipment investment is 14.17%.