QuestionJuly 21, 2025

Reinard Company has purchased a piece of equipment that cost 700,000 with an average amount invested of 100,000 and has an expected life of 8 years. The company's expects average operating income from the equipment to be 10,000 per year. What is the accounting rate of return (ARR)? 14% 5% 10% 2%

Reinard Company has purchased a piece of equipment that cost 700,000 with an average amount invested of 100,000 and has an expected life of 8 years. The company's expects average operating income from the equipment to be 10,000 per year. What is the accounting rate of return (ARR)? 14% 5% 10% 2%
Reinard Company has purchased a piece of equipment that cost 700,000
with an average amount invested of 100,000 and has an expected life of 8
years. The company's expects average operating income from the equipment
to be 10,000 per year.
What is the accounting rate of return (ARR)?
14% 
5% 
10% 
2%

Solution
3.8(254 votes)

Answer

1.43\% Explanation 1. Identify the Formula for ARR The Accounting Rate of Return (ARR) is calculated using the formula: **ARR = \frac{\text{Average Annual Operating Income}}{\text{Initial Investment}} \times 100\%**. 2. Calculate ARR Substitute the given values into the formula: **ARR = \frac{10,000}{700,000} \times 100\% = 1.43\%**.

Explanation

1. Identify the Formula for ARR<br /> The Accounting Rate of Return (ARR) is calculated using the formula: **ARR = \frac{\text{Average Annual Operating Income}}{\text{Initial Investment}} \times 100\%**.<br /><br />2. Calculate ARR<br /> Substitute the given values into the formula: **ARR = \frac{10,000}{700,000} \times 100\% = 1.43\%**.
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