Question

A machine costs $180,000 and will have an eight-year life, a $20,000 salvage value, and straight-line depreciation is used. Management estimates the machine will yield an after-tax net income of $12,500 each year. Compute the accounting rate of return for the investment.

Answer 1

Answer:

12.5%

Explanation:

Computation for the accounting rate of return for the investment

Using this formula

Accounting rate of return=After-tax net income/[(Machine costs+Salvage value)/2]

Let plug in the formula

Accounting rate of return = $12,500/[($180,000 + $20,000)/2]

Accounting rate of return=$12,500/$100,000

Accounting rate of return=0.125*100

Accounting rate of return= 12.5%

Therefore the Accounting rate of return for the investment will be 12.5%