Question

Osler Company is considering an investment with the following data: Initial cost $200,000 Annual net cash inflows $25,000 Expected life 10 years Salvage value none Depreciation will be taken on a straight-line basis over the expected life of the investment. What is the accounting rate of return for the investment?

Answer 1

Answer:

The accounting rate of return is 4,28%

Explanation:

Use excel or a spreadsheet to calculate this ratio. See document attached.

We use a cash flow to solve this situation.

At moment 0 we have the investment cost , in this case -$200,000 (negative). From period 1 to period 10, we have incomes o benefits of $25000. Then, we calculate the Net cash flow that is the difference between benefits and cost.

We use all the result (positive and negative) in Net cash flow to get the rate if return. We use the specific formula to get it.