Question

Watson Corporation is considering buying a machine for $25,000. Its estimated useful life is 5 years, with no salvage value. Watson anticipates annual net income after taxes of $1,500 from the new machine. What is the accounting rate of return assuming that Watson uses straight-line depreciation and that income is earned uniformly throughout each year? Multiple Choice 6.0%. 8.0%. 8.5%. 10.0%. 12.0%.

Answer 1

Answer:

12%

Explanation:

The computation of the accounting rate of return is shown below:

Accounting rate of return = Average profit ÷ Average investment

where

Average profit is

= $1,500 × 5 years ÷ 5 years

= $1,500

And, the average investment is

= $25,000 ÷ 2

= $12,500

So, the accounting rate of return is

= $1,500 ÷ $12,500

= 12%

We simply applied the applied formula