ABC Company has purchased a piece of equipment that cost $600,000 with an average amount invested of $200,000 and has an expected life of 5 years. The company's expects average operating income from the equipment to be $10,000 per year. What is the average rate of return (ARR) ?

The correct answer to the following question is 5%.

Explanation:

Given information -

ABC company purchased equipment which costs - $600,000

Average amount invested in the equipment - $200,000

Equipment expected life - 5 years

Average operating income that company gets from the equipment - $10,000

ARR (Average annual return) -

Operating income from equipment / Average amount invested in equipment

= $ 10,000 / $ 200,000 x 100

= 5%