41 Sayer Tool Co. is considering investing in specialized equipment costing $630,000. The equipment has a useful life of five years and a residual value of S61,000. Depreciation is calculated using the straight - line method. The expected net cashinflows from the investment are given below:Year 1$207,0002153,0003170,000496,000554,000$680,000What is the accounting rate of return on the investment? (Round your answer to two decimal places.)O A. 3.21%ОВ. 7.05%OC. 6.43%O D. 7.80%

Straight line depreciation = (Cost of asset - Residual value) / Useful life in years =($630,000 -…

Business

Accounting

41

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

Sayer Tool Co. is considering investing in specialized equipment costing $630,000. The equipment has a useful life of five years and a residual value of S61,000. Depreciation is calculated using the straight - line method. The expected net cash
inflows from the investment are given below:
Year 1
$207,000
2
153,000
3
170,000
4
96,000
5
54,000
$680,000
What is the accounting rate of return on the investment? (Round your answer to two decimal places.)
O A. 3.21%
ОВ. 7.05%
OC. 6.43%
O D. 7.80%

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