A company is planning to purchase a machine that will cost $35,400, have a six-y

Question

A company is planning to purchase a machine that will cost $35,400, 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? $147,000 Sales Costs: Manufacturing Depreciation on machine Selling and administrative expenses $53,900 5,900 49,000 (108,800) $38,200 (13,370) Income before taxes Income tax (35%) Net income $24,830 o 33.33% 0 70.14% 140.28% 0 5.90% 0 50.00%

Explanation / Answer

Accounting rate of return is the ratio of average accounting profit of a project to the average investment made in the project. Accounting rate of return = Average Accounting profit / Average Investment in a project Accounting rate of return = $24830 / $35400 = 70.14%

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