Best Cleaners is considering whether to purchase a delivery truck that will cost

Question

Best Cleaners is considering whether to purchase a delivery truck that will cost $55,000, last six years, and have an estimated residual value of $5,100. Average annual net income from the delivery service is estimated to be $3,900. Best Cleaners' owners seek to earn an accounting rate of return of 10 percent.

Compute the average investment cost and the accounting rate of return. Use one decimal place for accounting rate of return.

Should the investment be made?
SelectYesNo

Explanation / Answer

average investment = begining book value + ending book value divided by 2 = (55,000 + 5,100)/2 = 30,050 accounting rate of return = 3900/30,050 = 0.1298 which is 12.98% average investment cost = $30,050 acconting rate of return = 12.98% should the investment be made: yes

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