Answer: ARR = Average profit/Initial outlay x 100
ARR = $19,000/$250,000 x 100
ARR = 7.60%
The correct answer is C
Depreciation = Cost - Residual value/Estimated useful life
= $250,000 - $20,000/5 years
= $46,000 per annum
Average profit = Total profit/No of years
= $325,000/5
= $65,000
$
Average profit 65,000
Less: Depreciation 46,000
Average profit after depreciation 19,000
Explanation: In determining the accounting rate of return of the investment, there is need to calculate depreciation using straight line method. The amount of depreciation would be deducted from the average profit so as to obtain the average profit after depreciation. The average profit would be divided by the initial outlay in order to obtain the accounting rate of return.
The Accounting rate of return is C which is 7.60%
First step is to calculate Total Net Income Value
Total Net Income Value = Total Cash flows - Total Depreciation
Total Net Income Value = $325,000 - ( $250,000 - $20,000 )
Total Net Income Value=$325,000-$230,000
Total Net Income Value= $95,000
Second step is to calculate Average net income
Average net income = Total net Income / Numbers of years
Average net income = $95,000 / 5
Average net income= $19,000
Now let calculate the Accounting rate of return
Accounting rate of return = (Average annual income / Initial Investment) * 100
Accounting rate of return = ($19,000 / 250,000) * 100
Accounting rate of return = 7.60%
In conclusion the Accounting rate of return is 7.60%
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