Question

A company is planning to purchase a machine that will cost $26,400 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 $ 93,000 Costs: Manufacturing $ 50,000 Depreciation on machine 4,400 Selling and administrative expenses 33,000 (87,400 ) Income before taxes $ 5,600 Income tax (40%) (2,240 ) Net income $ 3,360

Answer 1

21.2%

Step-by-step explanation:

The formula to compute the accounting rate of return is shown below:

= Annual accounting profit ÷ average investment

where,

Annual accounting profit is $5,600

And, the average investment would be $26,400

Now put these values to the above formula

So, the rate would equal to

= $5,600 ÷ $26,400

= 21.2%

we simply divide the annual accounting profit by the average investment so that correct accounting rate of return can come