Question

Palmer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $175,000. The equipment will have an initial cost of $500,000 and have a 7 year life. If the salvage value of the equipment is estimated to be $10,000, what is the accounting rate of return?

Answer 1

35%

Step-by-step explanation:

Accounting rate of return =Average annual net income*100/Average investment

Average investment = (500000+10000/2) = 255000

Accounting rate of return = 175000*100/255000 = 68.63%

Accounting rate of return = 175000*100/500000 = 35%