QS 24-6 Accounting rate of return LO P2 Project A requires a $280,000 initial in

Question

QS 24-6 Accounting rate of return LO P2

Project A requires a $280,000 initial investment for new machinery with a five-year life and a salvage value of $30,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $20,000 per year for the next five years. Compute Project A’s accounting rate of return

Project A requires a $280,000 initial investment for new machinery with a five-year life and a salvage value of $30,000. The company uses straight-line depreciation. Project A is expected to yield annual net income of $20,000 per year for the next five years. Compute Project A’s accounting rate of return

Explanation / Answer

Annual average investment = (280000+30000)/2= 155000 Annual after­tax net income/Annual average investment = Accounting rate of return 20000/155000= 12.90%

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