Question

Peng Company is considering buying a machine that will yield income of $2,100 and net cash flow of $19,500 per year for three years. The machine costs $59,700 and has an estimated $7,500 salvage value. Compute the accounting rate of return for this investment.

Answer 1

The accounting rate of return for this investment given its income, cost of the machine and the salvage value is 8.05%.

What is the accounting rate of return?

The accounting rate of return is a capital budgeting method used to determine the level of profitabiliy of an investement.

Accounting rate of return = Average net income / Average book value

Average book value = (cost of equipment - salvage value) / 2

Average book value = (59700 - 7500) / 2 = $21,600

Accounting rate of return = $2100 / 21600 = 8.05%

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