The manager of Malan Pty Ltd wants to buy a new machine to replace the one currently being used. The new machine will cost $100 000 with no disposal value at the end of a five-year useful life. The manager estimates that the machine will reduce annual operating costs by $30 000. Depreciation will be $20 000 per year for five years. The tax rate for each year is expected to be 20 per cent and the company has an after-tax hurdle rate of 12 per cent. What is the after-tax accounting rate of return computed based on the initial investment?

Question

Quizplus · Accepted Answer

The after-tax accounting rate of return is calculated as the average annual after-tax profit divided by the initial investment. The annual savings in operating costs is $30,000, and depreciation is $20,000, so the annual profit before tax is $10,000. After a 20% tax, the profit is $8,000. The initial investment is $100,000, so the after-tax accounting rate of return is $8,000 / $100,000 = 8%.

The Manager of Malan Pty Ltd Wants to Buy a New