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

Answer 1

Answer:

12%

Explanation:

Accounting rate of return = Average net income / Average book value

Average book value = (Cost of equipment - salvage value) / 2

Average book value =  ($25,000 - 0) / 2 = $12,500

AAR = $1500 / $12,500 = 0.12 = 12%