[thetoddgreen]

I had a questions regarding ARR on an investment, and I can’t seem to come up with the numbers in the solution. What am I missing here?

Initial cost: $66,000 w/ 6 year life and $16,000 salvage value.
Annual incremental income before tax: $7,200
Tax rate: 30%

ARR=average incremental net income/initial investment
The solution was calculated as 5,040/41,000 = 12.29%

5,040 came from after tax net income (7200 x 0.7), but I cannot for the life of me use any numbers given to come up with the 41,000 for the denominator

[cpaMD86]

66,000 + 16,000 (Salvage Value) = 82,000

Now take the average: 82,000/2 = 41,000

Your denominator should also be the average initial investment.

FAR: 9/3

[thetoddgreen]

@cpaMD86

The fact that that is so simple, pisses me off… hahaha

However, why do we add the salvage value to the initial cost? I would have never considered the logic. I mean, salvage value is part of the original value – it is where depreciation stops. So why add the value of it at the time of disposal to the cost that it is already included in?

[Author]

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