A company is evaluating an investment
The company uses the straight-line method of depreciation. Use the following information to compute the accounting rate of return. Show your calculations and round to one decimal place.
Project
Investment $875,000
Residual value 0
Operating income:
Year 1 120,000
Year 2 120,000
Year 3 120,000
Year 4 120,000
Year 5 120,000
What will be an ideal response
ARR = Average annual operating income / Average amount invested
= $120,000 / ($875,000 / 2 )
= $120,000 / $437,500
= 27.4%
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