A new manufacturing machine is expected to cost $278,000, have an eight-year life, and a $30,000 salvage value. The machine will yield an annual incremental after-tax income of $35,000 after deducting the straight-line depreciation. Compute the accounting rate of return for the investment.

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual after-tax income by the average investment. The average annual after-tax income is $35,000, and the average investment is ($278,000 + $30,000) / 2 = $154,000. Therefore, the accounting rate of return is $35,000 / $154,000 = 22.7%.

A New Manufacturing Machine Is Expected to Cost $278,000, Have