Question

Carmel Corporation is considering the purchase of a machine costing $36,000 with a 6-year useful life and no salvage value. Carmel uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Carmel's average investment

Answer 1

Answer: $18,000

Explanation:

From the question, we are told that Carmel Corporation is considering buying a machine that cost $36,000 with a 6-year useful life and no salvage value and the straight-line depreciation was used on the assumption that the annual cash inflow from the machine will be received uniformly throughout each year.

Accounting rate of return will be the average profit divided by the average investment

The average investment is made of up of the cost of the asset, its salvage value and working capital. Average investment will be the machines and cost divided by 2.

= $36000/2

= $18000.

The average investment is $18,000