Question

Horn Company is considering the purchase of a new machine for $108,000. The machine would replace an old piece of equipment that costs $41,830 per year to operate. The new machine would cost $25,720 per year to operate. The old machine currently in use can be sold for $9,500 if the new machine is purchased. The new machine would have a useful life of ten years with a $6,000 salvage value. Calculate the accounting rate of return on the machine that Horn Company is considering buying. Enter your answer as a number without the % symbol. For example, if your answer is 10%, simply enter 10 as your answer.

Answer 1

Accounting rate of return is 6%

Step-by-step explanation:

The new machine would cost $108,000 minus the trade-in value of the old machine i.e $108,000-$9500=$98,500.00

The annual profit =Savings of operational costs on the old machine-costs of operating the new machine-depreciation

Costs of operating the old machine is $41,830

Costs of operating the new machine is $25,720

annual depreciation on the new machine=($108,000-$6,000)/10=$10,200

annual profit=$41,830-$25,720-$10,200=$5,910

Accounting rate of return=annual profit/average operating assets

accounting rate of return=$5,910/$98,500=6%