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Palmer Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $136,300. The equipment will have an initial cost of $470,000 and have a 7 year life. If the salvage value of the equipment is estimated to be $8,000, what is the accounting rate of return?

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Answer:

The correct answer is 29.00%

Explanation:

The account rate of return on investment is the percentage of the amount invested that makes up the net return on investment. This is calculated as:

rate of return = (net income from investment ÷ cost of investment) × 100

net income from investment = $136,300

cost of investment = $470,000

∴ Rate of return = (136,300 ÷ 470,000) × 100 = 0.29 = 29%

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