Question

Sayer Tool Co. is considering investing in specialized equipment costing $610,000. The equipment has a useful life of five years and a residual value of $69,000. Depreciation is calculated using the straight-line method. The expected net cash inflows from the investment are given below:

Year 1	$210,000
2	159,000
3	160,000
4	95,000
5	136,000
​	$760,000

What is the accounting rate of return on the investment? (Round your answer to two decimal places.)

Answer 1

Ans.	*Calculations for Accumulated depreciation :
	Straight line depreciation = (Cost of asset - Residual value) / Useful life in years
		($610,000 - $69,000) / 5
		$541,000 / 5
		$108,200
	*In Straight line method the depreciation is equal in each year.
	Year	Depreciation
	1	$108,200
	2	$108,200
	3	$108,200
	4	$108,200
	5	$108,200
	Accumulated depreciation	$541,000
	*Calculations for Average net income :
	Total expected cash inflow	$760,000
	Less: Accumulated depreciation	-$541,000
	Total net income	$219,000
	Average net income = Total net income / Useful life in years
	$219,000 / 5
	$43,800
	*Calculations for Average investment :
	*Average investment =   (Cost of equipment + Residual value) / 2
	($610,000 + $69,000) / 2
	$679,000 / 2
	$339,500
	*Calculations for Accounting rate of return :
	Accounting rate of return = Average net income / Average investment * 100
	$43,800 / $339,500 * 100
	12.90%