The following data concerns a proposed equipment purchase: Cost $ 144,000 Salvage value $ 4,000 Estimated useful life 4 years Annual net cash flows $ 46,100 Depreciation method Straight-line Assuming that net cash flows are received evenly throughout the year, the accounting rate of return is (ignore income taxes):

Accounting rate of return = 15%

Explanation:

Accounting rate of return =Net income(Net cash flow - depreciation expense) / Average investment x 100

but depreciation = Cost of equipment - salvage value/ useful life

=(144,000 - 4000)/ 4=  140,000/ 4= $35,000

also,

Average Investment = Cost of equipment +salvage value /2

=( 144,000+4000)/ 2= 148,000 /2 = $74,000

Accounting rate of return =Net income(Net cash flow - depreciation expense) / Average investment x 100

(46,100 - 35,000)/ 74,000}  x 100 =11,100/74,000=0.15 x 100= 15%

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