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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Average rate of return—cost savings

Sager Industries is considering an investment in equipment that will replace direct labor.The equipment has a cost of $1.200,000 with a $300,000 residual value and a 10-year life.The equipment will replace three employees who has an average total wages of $180,000per year. In addition, the equipment will have operating and energy costs of $7,500 peryear.

Determine the average rate of return on the equipment, giving effect to straight-linedepreciation on the investment.

To determine

Concept Introduction:

ARR:

Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.

The formula to calculate ARR is as follows:

To Calculate:

The Average rate of return for the investment

Explanation

The Average rate of return for the investment is calculated as follows:

    Expected Total Savings (A) (180000+7500*10) $ 255,000
    Number of years (B)8

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