A company is planning to purchase a machine that will cost $27,000, have a six-y

Question

A company is planning to purchase a machine that will cost $27,000, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine? Sales $105,000 Costs: Manufacturing $52,500 Depreciation on machine 4,500 Selling and administrative expenses 35,000 (92,000) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- Income before taxes $13,000 Income tax (30%) (3,900) -------------------------------------------------------------------------------- Net income $9,100

Explanation / Answer

After tax net income 2000/24 = 8.3%

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