Question

An investment of $10,000 provides average net cash flows of $500 with zero salvage value. Depreciation is $15 per year. Calculate the accounting rate of return using the original investment. (Note: Round the answer to two decimal places.) a.4.85% b.3.41% c.5.19% d.6.47% e.3.29%

Answer 1

Answer: a.4.85%

Step-by-step explanation:

The accounting rate of return will be calculated as:

= Average annual profit / Initial investment

where,

Average annual profit will be:

= Net cash flows - Depreciation expense

= $500-$15

= $485

Initial investment = $10000

Therefore, the accounting rate of return will be:

= $485 / $10,000

= 4.85%