Community Hospital is purchasing a new ambulance. The ambulance will cost $150,000, which will be depreciated at $30,000 per year for five years. Related cash inflows from reimbursements are projected to be $80,000 annually. The hospital expects to replace the vehicle when it is fully depreciated. How much is the accounting rate of return on this investment?

• A. -20%
• B. -33%
• C. -60%
• D. -80%

Answer: (B)

Accounting rate of return measures profitability by comparing accounting profit to the amount invested. Here, the annual accounting profit is the revenue from reimbursements minus depreciation, since depreciation is an accounting expense even though it’s not a cash outflow. Reimbursements: 80,000 each year. Depreciation: 30,000 each year. So annual accounting profit = 80,000 − 30,000 = 50,000.

The initial investment is 150,000. If you use the common ARR approach of dividing annual accounting profit by the initial investment, the ARR is 50,000 / 150,000 = 0.333… or about 33%.

Some definitions use average investment instead of the initial cost. With straight-line depreciation to zero over five years, the average investment is (150,000 + 0)/2 = 75,000. That yields 50,000 / 75,000 = 0.666… or about 66.7%.

Taxes aren’t specified, so this uses pre-tax accounting profit. There’s no salvage value given, which would affect the average investment if used. The typical result in this setup is about 33% (using initial investment), not a negative value. The provided option showing a negative percentage likely reflects a sign convention or calculation error.