Question

A company is planning to purchase a machine that will cost $27,600 with a six-year life and 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? Sales $ 94,000 Costs: Manufacturing $ 50,100 Depreciation on machine 4,600 Selling and administrative expenses 34,000 (88,700 ) Income before taxes $ 5,300 Income tax (35%) (1,855 ) Net income $ 3,445

Answer 1

24.96%

Step-by-step explanation:

Data provided

Net income = $3,445

Purchase machine cost = $27,600

The computation of accounting rate of return is shown below:-

Accounting rate of return = Net income ÷ Average investment

= $3,445 ÷ ($27,600 ÷ 2)

= $3,445 ÷ $13,800

= 24.96%

So, for computing the accounting rate of return we simply applied the above formula.