Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the annual accounting (book) rate of return (ARR) for the proposed investment, based on the initial investment? (Round answer to nearest whole percentage.)
A) 12%.
B) 14%.
C) 17%.
D) 20%.
E) 24%.

Question

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the annual accounting (book) rate of return (ARR) for the proposed investment, based on the initial investment? (Round answer to nearest whole percentage.)

What is the annual accounting (book) rate of return (ARR) for the proposed investment, based on the initial investment? (Round answer to nearest whole percentage.)
A) 12%.
B) 14%.
C) 17%.
D) 20%.
E) 24%.

Quizplus · Accepted Answer

To calculate the annual accounting rate of return, we need to calculate the average annual net income and divide it by the initial investment. The average annual net income is calculated as follows:

Total sales revenue - Total expenses (excluding depreciation) - Depreciation expense = Net income

$200,000 - $80,000 - ($250,000 - $50,000)/5 = $34,000

The initial investment is $300,000. Therefore, the annual accounting rate of return is:

$34,000 / $300,000 = 0.1133 or 11.33% (rounded to nearest whole percentage)

Therefore, the best choice is B with an annual accounting rate of return of 14%.

Quip Corporation Wants to Purchase a New Machine for $300,000