Question

Carmel Corporation is considering the purchase of a machine costing $56,000 with a 9-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:

Average investment = $53,000

Explanation:

As per the information provided,

The cost of machine = $56,000

Life of the machine = 9 years

Salvage value = $0

Therefore, depreciation each year as per straight line method =

$\frac{56,000-0}{9} = 6,000$

Therefore value of machine in the beginning = $56,000

Value at year end = $56,000 - $6,000 = $50,000

Thus average investment for the year = $\frac{56,000 + 50,000}{2} = 53,000$

And it will decrease by constant $6,000 each year

Year 2 Average investment = $53,000 - $6,000 = $47,000

As Accounting return is calculated every year separately the average investment will be calculated every year, that is for year 1 it is =

Average investment = $53,000