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Classic Manufacturers invests $200,000 in a piece of equipment. The company’s management has estimated that the...

Classic Manufacturers invests $200,000 in a piece of equipment. The company’s management has estimated that the equipment will generate revenue of $50,000 in Year 1, $60,000 in Year 2, and $80,000 in Year 3 to Year 5. At the end of Year 5 the equipment will have zero salvage value. Given that the company depreciates the equipment on a straight-line basis and that there are no other revenues and expenses, the average accounting rate of return is closest to:

A.

70%
B.

25%
C.

30%
D.

75%

Solutions

Expert Solution

Average Profit = Average Revenue - Depreciation per year

= 70,000-40,000

= $30,000

Average Investment = (Cost + Salvage value)/2

= (200,000+0)/2

= $100,000

Average Accounting Return = Average Profit/Average Investment

= 30,000/100,000

= 30%

Hence, the answer is c.

jeff jeffy answered 2 years ago
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