Carmino Company Is Considering an Investment in Equipment That Is $\begin{array}{lr}\text { Year 1 } & \$30,000 \\\text { Year 2 } & 15,000 \\\text { Year 3 } & 7,500 \\\text { Year 4 } & 3,750\end{array}$

question 32

Multiple Choice

Carmino Company is considering an investment in equipment that is expected to generate an after-tax income of $6,000 for each year of its four-year life. The asset has no salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the investment at the beginning of each year is expected to be as follows: $\begin{array}{lr}\text { Year 1 } & \$30,000 \\\text { Year 2 } & 15,000 \\\text { Year 3 } & 7,500 \\\text { Year 4 } & 3,750\end{array}$ Calculate this asset's accounting (book) rate of return (ARR) on average investment (which is defined as a simple average of the average book value of the asset for each year of its four-year life) . Round the final answer to the nearest whole %.

• A) 15%.
• B) 27%.
• C) 36%.
• D) 43%.
• E) 58%.

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Definitions:

360-Day Year

A financial convention or calculation basis where the year is assumed to consist of 360 days rather than 365 or 366 days, often used in interest rate calculations.

Ordinary Simple Interest Rate

The standard method of calculating interest, typically based on the original loan amount, rate, and time.

360-Day Year

A conventional method in finance where the year is assumed to have 360 days for simplifying interest rate calculations, commonly used in commercial lending.

Exact Simple Interest

Interest calculated based on the actual number of days in the loan period divided by the exact number of days in a year, typically 365 or 366.