McCartney Corporation is contemplating an investment in new machinery costing $300,000. Themachine will be depreciated on a straight-line basis over a five-year life and is expected to increaserevenues by $284,000 and cash operating expenses by $220,000 per year. How much would themachine's salvage value need to be in order to achieve an accounting rate of return of 8%?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The annual profit is the increase in revenues minus the increase in expenses and depreciation. To achieve an ARR of 8%, the salvage value must be such that the average annual profit equals 8% of $300,000. Solving for the salvage value gives $50,000.

McCartney Corporation Is Contemplating an Investment in New Machinery Costing