Question

A company is planning to purchase a machine that will cost $29,400 with a six-year life and no salvage value. The company uses straight-line depreciation. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine?

Sales............................................................................ $117000
Cost:
Manufacturing...................................... $52,000
Depreciation on machine...................... 4900
Selling and administrative expenses..... 39,000 96,800
Income before Tax....................................................... 20,200
Income Tax(40%)......................................................... 8080
Net Income..................................................................$12,120

a. 6.00 years
b. 4.85 years.
c. 2.43 years.
d. 173 years.

Answer 1

The accounting rate of return (ARR) for the machine is calculated to be 41.22%. However, none of the provided options a-d match this calculation, suggesting there's an error with the options given. ARR measures the profitability of an investment in percentage terms.

Step-by-step explanation:

To calculate the accounting rate of return (ARR) for the machine, we use the formula:

ARR = (Average Annual Profit / Initial Investment) x 100

First, we calculate the average annual profit (Net Income) after depreciation and taxes, which is given as $12,120. The initial investment is the cost of the machine, which is $29,400. Plugging these into the formula gives us:

ARR = ($12,120 / $29,400) x 100

ARR = 41.22%

The ARR is used to determine the profitability of an investment, and it is clear that none of the choices (6.00 years, b 4.85 years, c 2.43 years, d 173 years) represent a rate, so there seems to be an error in the provided options.

On the basis of the given data and standard ARR calculation, none of options a-d are correct, as they do not reflect a percentage rate of return. The computed ARR here is 41.22%.