Detailed Answer
(d) The accounting rate of return (ARR) computes an
approximate rate of return which ignores the time value of
money. It is calculated as Expected increase in annual net income
??Initial (or Average) investment in a project. Tam’s expected
increase in annual income is as follows:
Annual savings in after-tax cash costs $20,000
Annual depreciation on equipment
($100,000 ??10 years) (10,000)
Increase in annual net income $10,000
A $100,000 initial investment is required to purchase the equipment.
Thus, the ARR of the equipment under consideration by
Tam is
$10,000 ??$100,000 = 10%