An equipment costing $60,000 is being evaluated for a production process at Don Jones Co. The expected benefits per year is $4,500 and estimated salvage value is $20,000. Determine the rate of return the company can get in this equipment proposal. Equipment life

Rate of return = 11.25%

Explanation:

The accounting rate of return is the average annual income expressed as a percentage of the average investment.

The simple rate of return can be calculated using the two formula below:

Accounting rate of return

= Annual operating income/Average investment * 100

Average investment = (Initial cost + scrap value) / 2

Average annual income = Total income over investment period / Number of years

Average investment = (60,000 + 20,000) / 2 = $40,000

Average annual income is already given as = 4,500

Rate of return = 4500/40,0000 * 100 = 50%

Rate of return = 11.25%