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 49,000 $53,900 5,900 (108,800) Income before taxes $38,200 (13,370) Income tax (35%) Net income $24,830 Multiple Choice 5.90%. K Prev 26 of 35Next> F2 OOD FA 8 3 4

Explanation / Answer

The rate of return can be calculated using the below mentioned formula,

Rate of return = (Net Income / Total Cost) * 100 %

Since, here net income = $ 24,830

Total Cost = $ 108,800

Therefore, Rate of return = (24830/108800) * 100 % = 22.81 %

The rate of return of the machine cannot be individually calculated as there are different types of costs involved in turning a raw material to a finished product and then making a sales in the market and the sales made cannot only depend on the machine but the total process as a whole which is a complex one.

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