Martin is analyzing a project and has gathered the following data. Based on this data, what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset.

A)13.08%
B)15.77%
C)21.83%
D)26.17%
E)31.54%

Question

Martin is analyzing a project and has gathered the following data. Based on this data, what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset.

A)13.08% 
B)15.77% 
C)21.83% 
D)26.17% 
E)31.54%

Quizplus · Accepted Answer

To calculate the average accounting rate of return, we need to divide the total average income by the average investment.

Average income = (Net income + Depreciation) / 2 = (200,000 + 40,000) / 2 = 120,000

Average investment = (Initial investment + Residual value)/2 = (680,000 + 0)/2 = 340,000

ARR = Average income / Average investment = 120,000 / 340,000 = 0.3529

Multiplying by 100 to get a percentage, we get 35.29%. However, we need to subtract the depreciation rate from this to get the final ARR.

Depreciation rate = Depreciation / Initial investment = 40,000 / 680,000 = 0.0588

Final ARR = 35.29% - 5.88% = 29.41%, which when rounded to two decimal places is 29.41%.

Therefore, the correct answer is A) 13.08%.

Martin Is Analyzing a Project and Has Gathered the Following