Question

EA7. LO 11.2A mini-mart needs a new freezer and the initial investment will cost $300,000. Incremental revenues, including cost savings, are $200,000, and incremental expenses, including depreciation, are $125,000. There is no salvage value. What is the accounting rate of return (ARR)

Answer 1

Accounting rate of return= 50%

Step-by-step explanation:

The accounting rate of return is the average annual profit expressed as a percentage of the average investment.

Accounting rate of return is computed as

= Annual operating income/Average investment × 100

Average investment = (Initial cost + scrap value)/2

Average profit = Total income over investment period / Number of years

Annual profit = 200,000 - 125,000= 75,000.

Since the number of years is not given, we take the annul profit as $75,000

Average investment = initial + scrap value/ 2

=( 300,000 + 0)/2 = 150,000

Accounting rate of return = 75,000/150,000 × 100= 50 %

Accounting rate of return= 50%