Colaw Company is considering buying equipment for $240,000 with a useful life of five years and an estimated salvage value of $12,000. If annual expected income is $21,000, the denominator in computing the annual rate of return is
A) $240,000.
B) $120,000.
C) $126,000.
D) $252,000.

Question

Quizplus · Accepted Answer

To compute the annual rate of return, the average annual income over the useful life of the equipment must be determined. 
Total income over 5 years: 
$21,000 x 5 = $105,000 
Average annual income: 
$105,000 / 5 = $21,000 
The denominator in the formula for annual rate of return is the initial investment minus the salvage value, divided by 2. 
($240,000 - $12,000) / 2 = $126,000 
Therefore, the answer is choice C.

Colaw Company Is Considering Buying Equipment for $240,000 with a Useful