A company is planning to purchase a machine that will cost $25,200, have a six-y

Question

A company is planning to purchase a machine that will cost $25,200, 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 $96,000 Costs: Manufacturing $52,200 Depreciation on machine 4,200 Selling and administrative expenses 32,000 (88,400) Income before taxes $7,600 Income tax (30%) (2,280) Net income $5,320

Explanation / Answer

Accounting rate of return for machine = Net income / Net investment in machine = $ 5,320 / $ 25,200 x 100 = 21.11%

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