Question

A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

Answer 1

Answer:

22.7 %

Explanation:

Accounting rate of return = Average Profits / Average Investments × 100

Where,

Average Profit = Sum of Profits ÷ Number of Years

                        = $35,000

and

Average Investment = (Initial Investment + Salvage Value) ÷ 2

                                  = ($278,000 + $30,000) ÷ 2

                                  = $154,000

Therefore,

Accounting rate of return = $35,000 ÷ $154,000

                                          = 22.7 %