Question

Build Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with no residual value for all depreclable assets. Bulld's combined Income tax rate is 40%. Management requlres a minimum after-tax rate of return of 10% on all Investments. Rounded to the nearest whole percentage (e.g., 31.349%=31%), what is the annual accounting (book) rate of return (ARR) based on the initial investment? Multiple Choice 20% 405 . 12% 36%. 32%

Answer 1

The annual accounting (book) rate of return (ARR) based on the initial investment is 40%.

Step-by-step explanation:

The annual accounting (book) rate of return (ARR) based on the initial investment can be calculated using the formula:

ARR = Average Annual Net Income / Initial Investment × 100%

Given that the machine will produce sales of $200,000 each year and expenses amount to $80,000 per year, the annual net income can be calculated as:

Net Income = Sales - Expenses = $200,000 - $80,000 = $120,000

Using the initial investment of $300,000, we can calculate the ARR as:

ARR = $120,000 / $300,000 × 100% = 40%

So, the correct answer is 40%.