How to Calculate Accounting Rate of Return (ARR) for Equipment Investment

What is the accounting rate of return (ARR) for Moore Whole Distributors' equipment investment?

A. 6.0%

B. 5.0%

C. 3.3%

D. 6.7%

Answer:

The accounting rate of return (ARR) is closest to 16.67%, which is not one of the given options. Thus, none of the suggested options (6.0%, 5.0%, 3.3%, or 6.7%) is the correct answer.

Calculating the accounting rate of return (ARR) is essential for evaluating the profitability of an investment in equipment. In the case of Moore Whole Distributors' equipment investment, the ARR is approximately 16.67%, indicating a favorable return on the initial investment.

The ARR is determined by dividing the average annual profit by the initial investment amount and expressing it as a percentage. For the equipment with a 10-year life and no salvage value, using straight-line depreciation, the average annual profit can be calculated to determine the ARR.

By dividing the initial investment of $105,600 by the payback period of 6 years, the average annual profit is $17,600 ($105,600 / 6). This profit is then used to calculate the ARR by dividing it by the initial investment and multiplying by 100:

ARR = ($17,600 / $105,600) * 100 = 16.67%

Therefore, the accounting rate of return (ARR) for Moore Whole Distributors' equipment investment is closest to 16.67%, showcasing the profitability and viability of the investment decision. It is essential for businesses to consider the ARR when evaluating potential investments to ensure optimal returns and financial performance.