Accounting Rate of Return The accounting rate of return is another non-discounti

Question

Accounting Rate of Return

The accounting rate of return is another non-discounting financial model commonly used in making capital investment decisions. Unlike the payback period model, the accounting rate of return uses income rather than cash flow.

Assume that the investment is the same as before: Initial outlay of $100,000 with a five-year useful life and no salvage value under straight-line depreciation. The revenues are as follows: ( Year 1: $10,000, Year 2: $20,000, Year 3: $30,000, Year 4: $40,000 and Year 5: $50,000.)

Use the minus sign to indicate a net loss. If an amount is zero, enter "0". If required, enter the accounting rate of return as a decimal (i.e. 0.3).

Year Revenues Expenses Net Income $20,000 Year 1 Net Income (loss) Year 2 Net Income (loss) Year 3 Net Income (loss) = Year 4 N Year 5 Net Income (loss)- $10,000 = et Income (loss)- Income (loss)- et Income (loss)- =

Explanation / Answer

ARR=Average Income/Initial Investment*100= 10000/100000*100=10%

Average Income= Net Income of five years/5=50000/5=$10000

Revenue Expense Net Income($) Year 1 10000 20000 -10000 Year 2 20000 20000 0 Year 3 30000 20000 10000 Year 4 40000 20000 20000 Year 5 50000 20000 30000 Total 150000 100000 50000

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