Question

A company is considering purchasing a machine that costs $232000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $120000 and annual operating expenses exclusive of depreciation expense are expected to be $38000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is

Answer 1

Answer:

45.69%

Explanation:

The formula to compute the accounting rate of return is shown below:

= Annual net income ÷ average investment

where,  

Net income is

= Annual revenues - annual operating expenses

= $120,000 - ($38,000 + $232,000 ÷ 8 year)

= $120,000 - ($38,000 + $29,000)

= $53,000

And, the average investment would be

= (Initial investment) ÷ 2

= ($232,000) ÷ 2

= $116,000

Now put these values to the above formula  

So, the rate would equal to

= $53,000 ÷ $116,000

= 45.69%