Dartis Tools 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.)
A) 14.36%
B) 16.19%
C) 12.90%
D) 6.45%
C .C)
Calculation of accounting rate of return:
*Average amount invested = (Amount invested + Residual value) / 2
ARR of Equipment = Average annual operating income / Average amount invested
ARR = $43,800 / $339,500 = 12.90% (Rounded)
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