Question

Carmel Corporation is considering the purchase of a machine costing $49,000 with a 9-year useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Carmel's average investment?

a. $5,444.
b. $6,049.
c. $24,500.
d. $49,000.
e. $27,222.

Answer 1

Average investment will be $24500

So option (c) will be the correct answer

Step-by-step explanation:

We have given that cost of the machine = $49000

Average investment in calculating accounting rate of return is Sum of beginning and ending book value of project divided by 2.

In the present case , where straight line depreciation is used and there is no salvage value,

So the average investment will be equal to

`Average\ investment=(beginning\ book\ value+ending\ book\ value)/(2)=(49000+0)/(2)=$24500`

So average investment will be $24500

So option (C) will be the correct answer

Average Investment = (Begining book value+ Ending Book Value)/2

= (49000+0)/2

= $ 24,500