Question

A company buys a machine for $68,000 that has an expected life of 8 years and no salvage value. The company uses straight-line depreciation. The company anticipates a yearly net income of $3,250 after taxes of 36%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

a. 3.44%.
b. 4.78%.
c. 9.56%.
d. 6.12%.
e. 38.24%.

Answer 1

c. 9.56%

Step-by-step explanation:

Accounting Rate of Return = Average Profit / Average Investment × 100

where,

Average Profit = $3,250

Average Investment = $68,000 ÷ 2 = $34,000

Therefore,

Accounting Rate of Return = $3,250 ÷ $34,000

= 9.56 %