Clapton Corporation Is Considering an Investment in New Equipment Costing

Multiple Choice

Clapton Corporation is considering an investment in new equipment costing $900,000. The equipment will be depreciated on a straight-line basis over a ten-year life and is expected to have a salvage value of $90,000. The equipment is expected to generate net cash flows of $140,000 for each of the first five years and $100,000 for each of the last five years. What is the accounting rate of return associated with the equipment investment?

A) 12.1%
B) 7.9%
C) 17.3%
D) 9.7%