QS 24-7 Computation of accounting rate of return LO P2 Peng Company is consideri

Question

QS 24-7 Computation of accounting rate of return LO P2

Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6,000 salvage value. Compute the accounting rate of return for this investment; assume the company uses straight-line depreciation.

Peng Company is considering an investment expected to generate an average net income after taxes of $1,950 for three years. The investment costs $45,000 and has an estimated $6,000 salvage value. Compute the accounting rate of return for this investment; assume the company uses straight-line depreciation.

Explanation / Answer

Accounting Rate of Return = Annual after tax net income / Annual Average Investment

...........................................= $1,950 / [($45,000 + $6,000) / 2]

...........................................= $1,950 / $25,500

...........................................= 7.65%

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