A company is planning to purchase a machine that will cost $138,000, have a six-

Question

A company is planning to purchase a machine that will cost $138,000, have a six-year life, and be depreciated using the straight-line method 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.

58,500

(162,000)

( 24,000)

$ 24,000   

34.78%

50.00%

4%

33.30%

17.39%

A company is planning to purchase a machine that will cost $138,000, have a six-year life, and be depreciated using the straight-line method 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.

Explanation / Answer

SOLUTION

Accounting rate of return = 17.39%

Accounting rate of return = Accounting Income / Initial Investment

= $24,000 / $138,000

= 17.39%

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