Question
A piece of equipment costs $1.2 million. The equipment has a useful life of 4 years. In each of the four years, the use of
A piece of equipment costs $1.2 million. The equipment has a useful life of 4 years. In each of the four years, the use of the equipment generates a cash inflow of $0.5 million. The impact of this investment project on net income is derived by subtracting depreciation from cash flow each year. The projects average accounting rate of return (AAR) equals the average contribution to net income divided by the average book value of the investment. Assume the equipment is depreciated on a straight-line basis over 4 years, what is the AAR?
16.7%
33.3%
66.7%
Cannot tell from the given information
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