A company is planning to purchase a machine that will cost $29,400 with a six-ye

Question

A company is planning to purchase a machine that will cost $29,400 with a six-year life and 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?

Multiple Choice

4.90%.

50.00%.

10.39%.

33.33%.

20.78%.

Sales $ 97,000 Costs: Manufacturing $ 50,400 Depreciation on machine 4,900 Selling and administrative expenses 37,000 (92,300 ) Income before taxes $ 4,700 Income tax (35%) (1,645 ) Net income $ 3,055

Explanation / Answer

Accounting rate of return = Annual net income*100/Average investment

                                      = 3055*100/14700

Accounting rate of return = 20.78%

So answer is e) 20.78%

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