A company is evaluating three possible investments. Each uses the straight-line method of depreciation. The following information is provided by the company: $\begin{array}{|l|r|r|r|}
\hline& \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 240,000 & \$ 54,000 & \$ 240,000 \
\hline \text { Residual value } & 0 & 10,000 & 36,000 \
\hline \text { Net cash inflows: } & & &\\hline \text { Year 1 } & 52,000 & 40,000 & 96,000 \
\hline \text { Year 2 } & 52,000 & 31,000 & 66,000 \
\hline \text { Year 3 } & 52,000 & 27,000 & 76,000 \
\hline \text { Year 4 } & 52,000 & 24,000 & 36,000 \
\hline \text { Year 5 } & 52,000 & 0 & 0 \\hline
\end{array}$ What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

Question

A company is evaluating three possible investments. Each uses the straight-line method of depreciation. The following information is provided by the company: $\begin{array}{|l|r|r|r|} 
\hline& \text { Project A } & \text { Project B } & \text { Project C } \
\hline \text { Investment } & \$ 240,000 & \$ 54,000 & \$ 240,000 \
\hline \text { Residual value } & 0 & 10,000 & 36,000 \
\hline \text { Net cash inflows: } & & &\\hline \text { Year 1 } & 52,000 & 40,000 & 96,000 \
\hline \text { Year 2 } & 52,000 & 31,000 & 66,000 \
\hline \text { Year 3 } & 52,000 & 27,000 & 76,000 \
\hline \text { Year 4 } & 52,000 & 24,000 & 36,000 \
\hline \text { Year 5 } & 52,000 & 0 & 0 \\hline
\end{array}$ What is the accounting rate of return for Project C? (Round your answer to two decimal places.)

Quizplus · Accepted Answer

The Accounting Rate of Return (ARR) is calculated as the average annual profit divided by the initial investment. For Project C, the initial investment is $240,000, and the residual value is $36,000, leading to a total depreciation of $204,000 over 5 years, or $40,800 annually. The total net cash inflows over 5 years are $274,000. Subtracting the total depreciation ($204,000) from the total net cash inflows gives a total profit of $70,000 over 5 years, or an average annual profit of $14,000. The ARR is then $14,000 / $240,000 = 5.83%. However, this calculation does not match any of the provided options, indicating a mistake in the calculation process. The correct approach to calculate ARR is to use the average annual operating income (net cash inflows - annual depreciation) divided by the average investment (initial investment + residual value / 2). The correct calculation should consider the correct formula for ARR, which involves the average annual profit and the average investment, not just the initial investment.

A Company Is Evaluating Three Possible Investments What Is the Accounting Rate of Return for Project C