Question

Water World is considering purchasing a water park in​ Atlanta, Georgia, for $1,800,000. The new facility will generate annual net cash inflows of $457,000 for eight years. Engineers estimate that the new facilities will remain useful for eight years and have no residual value. The company uses​ straight-line depreciation, and its stockholders demand an annual return of 12% on investments of this nature.

Determine the formula and calculate the accounting rate of return​ (ARR). ​(Round the percentage to the nearest tenth​percent, X.X%.)

Answer 1

25.78%

Step-by-step explanation:

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

= Annual net income ÷ average investment

where,

Annual net income is

= {(Total net inflows × number of years) - (purchased value)} ÷ (number of years)

= {($457,000 × 8 years) - ($1,800,000)} ÷ 8 years

= $232,000

And, the average investment would be

= (Initial investment + salvage value) ÷ 2

= ($1,800,000 + $0) ÷ 2

= $900,000

Now put these values to the above formula

So, the rate would equal to

= $232,000 ÷ $900,000

= 25.78%