Pilot Corporation is considering the purchase of equipment costing $100,000.The equipment will reduce operating cash expenses by $25,000 each year.The new equipment has a salvage value of $2,000 and will be depreciated over a 10-year useful life.The accounting rate of return is closest to
A)15.2%.
B)25%.
C)25.5%.
D)35%.

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The annual savings from reduced expenses is $25,000, and depreciation is ($100,000 - $2,000) / 10 = $9,800. The annual profit is $25,000 - $9,800 = $15,200. ARR = $15,200 / $100,000 = 15.2%.

Pilot Corporation Is Considering the Purchase of Equipment Costing $100,000