Question

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's after-tax net income, based on a tax rate of 40%, is $2,400. What is the approximate accounting rate of return for the machine?

Answer 1

Accounting rate of return is 10%

Step-by-step explanation:

Given data

new machine = $48,000

sales = $16,000

time = 10 year

depreciation = $4,000 / year

factory overhead = $8,000 + depreciation $4,000

net income = $2400

tax rate = 40%

to find out

accounting rate of return for the machine

solution

we know that

Accounting rate of return = after tax net income / average investment

so here we know net income after tax = $2400

so we find investment first

Average investment = (Initial investment) / 2

Average investment = 48000 / 2 = $24000

so

Accounting rate of return = after tax net income / average investment

Accounting rate of return = 2400 / 24000 = 0.1 = 10%

Accounting rate of return is 10%