128k views
5 votes
Gunslinger Company is considering the purchase of pipe cutting equipment. Data on the equipment are as follows: Original Investment $35,000 Net Annual Cash Inflow $8,000 Expected Economic Life in Years 5 The Company uses the straight-line method of depreciation with no mid-year convention. What is the accounting rate of return (ARR) on original investment

1 Answer

3 votes

Answer:

4.86%

Step-by-step explanation:

The formula to compute the accounting rate of return is shown below:

= Annual net income ÷ original investment

where,

Average Accounting Income is

= Annual Cash Inflow – Depreciation

= $8,000 - $6,300

= $1,700

The Depreciation is

= ($35000 - $,3500) ÷ 5 years

= $6,300

And, the original investment is $35,000

So, the accounting rate of return is

= $1,700 ÷ $35,000

= 4.86%

We simply applied the above formula

User Nwinkler
by
8.8k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories