Chilly Company is considering investing $110,000 in a new refrigerator, designed to keep food extra crispy. The refrigerator will have a useful life of 10 years, a salvage value of $10,000, and is expected to generate an annual income of $15,000 in each year of its useful life. Chilly will use the straight-line method of depreciation. What is the accounting rate of return?

 Chilly Company is considering investing $110,000 in a new refrigerator, designed to keep food extra crispy. The refrigerator will have a useful life of 10 years, a salvage value of $10,000, and is expected to generate an annual income of $15,000 in each year of its useful life. Chilly will use the straight-line method of depreciation. What is the accounting rate of return?

multiple choice
30%
13.64%
16.67%
25% Correct

Explanation
Knowledge Check 01
 
Accounting rate of return = Annual income of $15,000 ÷ Average investment of $60,000 = 0.25 or 25%.
Average investment = ($110,000 cost plus $10,000 salvage value) / 2 = $60,000.

 

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