Answer :
The accounting rate of return of the investment that yield $1,950 with initial investment of $45,000 will be 5%.
Accounting rate of return = Average net income / Average book value
Average book value = (cost of equipment - salvage value) / 2
Average book value = ($45,000 -$6,000) / 2 = $39,000
Accounting rate of return = $1,950/ 39,000 = 5%
The accounting rate of return (ARR) formula represents the anticipated percentage rate of return on an investment or an asset in proportion to the cost of the original investment. The ARR formula determines the percentage or return that may be anticipated during in the course of an asset or undertaking by dividing the asset's average income by the company's primary expenditure. The value of money over time and cash flows, which could be critical elements of maintaining a firm, are not taken into consideration by ARR.
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