   Chapter 15, Problem 2SEQ

Chapter
Section
Textbook Problem

Management is considering a $100,000 investmentin a project with a five-year life and no residualvalue. If the total income from the project is expected to be$60,000 and recognition is givento the effect of straight-line depreciation on theinvestment, the average rate of return is: A. 12% B. 24% C. 60% D. 75%

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:

ARR= Average Accounting profitsAverage Investment

To Calculate:

The Average Rate of Return

Explanation

The Average Rate of Return is calculated as follows:

 Expected Total Income (A) \$ 60,000 Number of years (B) 5

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