Question

The following data concerns a proposed equipment purchase: Cost$144,000 Salvage value$4,000 Estimated useful life 4years Annual net cash flows$46,100 Depreciation methodStraight-line Ignoring income taxes, the annual net income amount used to calculate the accounting rate of return is:

Answer 1

Answer: $74,000

Explanation:

The Average Investment refers to the average cash invested into a particular project and is useful in calculating the rate of return. The simple formula is to add the beginning value of the asset to its ending value and divide this by 2.

The ending value in this case would be the salvage value;

Average Investment = $\frac{Beginning Cost of Machine + Salvage Value}{2}$

= $\frac{144,000 + 4,000}{2}$

= $74,000