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26 August, 08:49

assume straight line depreciation & even cash flows. A company plans to purchase equipment for $25,000. The equipment will have $0 salvage value & increase after-tax income by $7,500 annually during its 5-year life. The accounting rate of return is

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  1. 26 August, 10:10
    0
    Answer: 10%-ARR

    Explanation:ARR - Accounting Rate of Return is used to make capital budgeting decisions and it can be calculated thus:

    1 - calculate the deprecation expenses = cost/useful life

    = 25,000/5=5,000

    2. calculate average annual profit = after tax income - expenses

    = 7,500-5000 (depreciation) = 2,500

    3. Calculate the ARR = Av annual profit / cost

    = 2,500 / 25000

    = 0.1

    =10%
  2. 26 August, 11:04
    0
    it's 60% not 10%
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