Question

Project A requires a $280,000 initial investment for new machinery with a five-year life and a salvage value of $30,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $20,000 per year for the next five years. QS 26-6 Accounting rate of return LO P2 Compute Project A’s accounting rate of return.

Answer 1

12.90%

Step-by-step explanation:

Annual average investment = (Initial investment + Salvage value) / 2

Annual average investment = ($280000 + $30000) / 2

Annual average investment = $155,000

Accounting rate of return = Annual after­-tax net income / Annual average investment

Accounting rate of return = $20,000 / $155,000

Accounting rate of return = 0.1290322581

Accounting rate of return = 12.90%