A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value.The company uses straight-line depreciation.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?
A)33.3%.
B)16.7%.
C)50.0%.
D)8.3%.
E)4%.

Question

A company is planning to purchase a machine that will cost $24,000 with a six-year life and no salvage value.The company uses straight-line depreciation.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?

-What is the accounting rate of return for this machine? 
A)33.3%. 
B)16.7%. 
C)50.0%. 
D)8.3%. 
E)4%.

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as average annual net income divided by initial investment.

Average annual net income = (Revenue - Expenses - Depreciation) / Number of years
= (90,000 - 48,000 - 4,000) / 6
= 6,333.33

ARR = Average annual net income / Initial investment
= 6,333.33 / 24,000
= 0.2639 or 26.39%

Therefore, the accounting rate of return for this machine is 26.39%, which is closest to option B, 16.7%.

A Company Is Planning to Purchase a Machine That Will