Question

A company is planning to purchase a machine that will cost $34,200, will have a six-year life, and will have no salvage value. 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 $ 104,000
Costs:
Manufacturing $ 51,100
Depreciation on machine 5,700
Selling and administrative expenses 44,000 (100,800)
Income $ 3,200

Answer 1

The accounting rate of return (ARR) for the machine is approximately 9.36%, calculated by dividing the annual income of $3,200 by the initial investment cost of $34,200.

Step-by-step explanation:

Calculating the Accounting Rate of Return

The accounting rate of return (ARR) is a financial metric used to assess the profitability of an investment or project. It can be calculated by dividing the average annual profit by the initial investment cost. Given the information, we can identify the average annual profit from the provided income statement.

First, we find the average annual profit, which will be the income after subtracting costs from sales. The given income statement shows an annual income of $3,200. Since the depreciation is already factored into costs, we directly use the annual income figure. With the initial investment cost being $34,200 and no salvage value, the ARR calculation is straightforward.

ARR = (Average Annual Profit / Initial Investment Cost) x 100
= ($3,200 / $34,200) x 100
= 9.36%

Hence, the accounting rate of return for the machine is approximately 9.36%.