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The following relates to a proposed equipment purchase:

Cost $161,000
Salvage value $7,000
Estimated useful life 4 years
Annual net cash flows $54,600

Depreciation method Straight-line Ignoring income taxes, the annual net income amount used to calculate the accounting rate of return is:___________

a. $54,600
b. $16,100
c. $17,850
d. $93,100
e. $52,850

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tutorAnne

Answer:Annual Net Income =$16,100---- B

Explanation:

Depreciation expense  using straight line = Cost - Salvage life / Useful life

($ 161, 000 - $7000) / 4

=$154,000 / 4

=$38,500

                           

Annual Net Income to calculate the accounting rate of return= Annual Cash flow - Depreciation

= $54,600 - $38,500

=$16,100

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