Question

Belmont Corp. is considering the purchase of a new piece of equipment. The cost savings from the equipment would result in an annual increase in net income after tax of $230,000. The equipment will have an initial cost of $1,000,000 and have an 8 year life. If there is no salvage value of the equipment, what is the accounting rate of return? Multiple Choice 18.0% 15.5% 46.0% 23.0%.

Answer 1

23.0%

Step-by-step explanation:

According to the problem, computation of given data are as follows,

Initial cost of equipment = $1,000,000

Net income after tax = $230,000

So, we can calculate the accounting rate of return by using following formula,

Accounting rate of return = Net income after tax ÷ Initial cost of equipment

By putting the value, we get

Accounting rate of return = $230,000 ÷ $1,000,000

= 0.23 or 23%

Hence, accounting rate for the given data is 23%.