Compute the accounting rate of return, rounded to 2 decimal places. Ferris Compa

Question

Compute the accounting rate of return, rounded to 2 decimal places.

Ferris Company is considering investing in new equipments that would cost $80,000 and have a 5-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are as follows: Increased Revenue $63,000 Increased Expenses Salary of additional operator 10,000 Supplies 9,000 Depreciation 16,000 Maintenance 3,600 38,600 Increased Income (Pre-tax) 24,400 Taxes (40%) 9,760 Increased Operating Income 14,640 The company has a debt to equity ratio of 1.5 (1.5 to 1). The pre-tax cost of debt is 10% and the cost of equity is 16%.

Explanation / Answer

Average Accounting Income = $14640 Accounting Rate of Return = $14640/ $80,000 ˜ 18.30%

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