Horn Company is considering the purchase of a new machine for $128,000. The mach

Question

 Horn Company is considering the purchase of a new machine for $128,000. The machine would replace an old piece of equipment that costs $41,860 per year to operate. The new machine would cost $16,140 per year to operate. The old machine currently in use can be sold for $6,000 if the new machine is purchased. The new machine would have a useful life of ten years with a $5,000 salvage value. 

 Calculate the accounting rate of return on the machine that Horn Company is considering buying. Enter your answer as a number followed by the percentage symbol with no spaces in between (i.e., 29%). 

Explanation / Answer

Old equipment operating cost / year      41,860.00 New Equiment operating cost/year      16,140.00 Saving in Operating Cost/year      25,720.00 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Investment         (128,000) Old machine sales value        6,000.00 Savings in Operating cost       25,720      25,720      25,720     25,720     25,720     25,720        25,720         25,720      25,720      25,720 Less Depreciation     (12,300) (12,300)    (12,300) (12,300) (12,300) (12,300)     (12,300)      (12,300)    (12,300)    (12,300) Salvage         5,000 Accounting Return       13,420      13,420      13,420     13,420     13,420     13,420        13,420         13,420      13,420      18,420 Total Accounting Return=         139,200 Average yearly accounting Return=            13,920 Investment   Average Investment=(Net Investment+Salvage)/2 =(128000-6000+5000)/2=            63,500 Accounting Rate of return=13920/63500= 21.92%

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