The following data concerns a proposed equipment purchase: Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is:
A) 62.3%.
B) 32.0%.
C) 15.0%.
D) 7.7%.
E) 5.0%.

Question

Quizplus · Accepted Answer

Accounting rate of return is calculated as the average net income divided by the average book value of the investment.

Average net income = (10,500 + 5,500)/2 = 8,000

Average book value of investment = (100,000 + 20,000)/2 = 60,000

Accounting rate of return = (8,000/60,000) x 100% = 13.3%

Therefore, the closest answer is C (15.0%).

The Following Data Concerns a Proposed Equipment Purchase: Assuming That