Question

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%. What is the estimated accounting (book) rate of return (ARR) for the proposed investment, based on average investment? (Round answer to nearest whole number/percentage.)

Answer 1

$101.22

Step-by-step explanation:

please see attachment

Answer 2

accounting rate of return: 20%

Step-by-step explanation:

cost: 300,000

depreciation:

(300,000-50,000) / 5 = 250,000 / 5 = 50,000 depreciation per year

sales: 200,000

operating expenses: (50,000)

depreciation (50,000)

income before taxes 100,000

tax expense: (40,000)

net income: 60,000

rate of return: net income / investment

60,000 / 300,000 = 0.2