Question

Nelson Corp is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in cash flow of $100,000. The equipment will have an initial cost of $400,000 and have a 5 year life. If the salvage value of the equipment is estimated to be $75,000, what is the accounting rate of return

Answer 1

14.74 %

Step-by-step explanation:

Accounting rate of return = Average Profits / Average Investment x 100

therefore,

Accounting rate of return = ($100,000 - $65,000) / $237,500 x 100

= 14.74 %

where,

Average Investment = ( initial investment + scrape value ) ÷ 2