SoundByte Industries is considering the purchase of a $180,000 machine that is expected to result in a decrease of $20,000 per year in cash expenses.This machine,which has no residual value,has an estimated useful life of 15 years and will be depreciated on a straight-line basis.For this machine,the accounting rate of return would be

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The annual depreciation is $180,000 / 15 = $12,000. The annual savings in cash expenses is $20,000, so the annual profit is $20,000 - $12,000 = $8,000. The ARR is $8,000 / $180,000 = 0.044 or 4.4 percent. However, the correct choice should be 8.9 percent, which suggests a miscalculation or misinterpretation in the options provided.

SoundByte Industries Is Considering the Purchase of a $180,000 Machine