Question

A machine costs $700,000 and is expected to yield an after-tax net income of $52,000 each year. Management predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return.

Answer 1

This machine’s accounting rate of return is 13 %=

Step-by-step explanation:

Accounting Rate of return: The accounting rate of return is also known as average rate of return in which the net income is proportionate to the average investment.

In mathematically,

Accounting rate of return = Net income ÷ Average investment

where, average investment = (Purchase cost + salvage value) ÷ 2

= ($700,000 + $100,000) ÷ 2

= $400,000

Now, apply the above formula

So the Accounting rate of return = $52,000 ÷ $400,000 = 13%

Hence, this machine’s accounting rate of return is 13 %