Omaha Plating Corporation is considering purchasing a machine for $1,500,000.The machine will generate a constant after-tax income of $100,000 per year for 15 years.The firm will use straight-line (SL)depreciation for the new machine over 10 years with no residual value.
What is the annual accounting (book)rate of return (rounded)on the initial investment?

Question

Quizplus · Accepted Answer

The annual accounting rate of return is calculated as the average annual profit divided by the initial investment. The annual depreciation is $150,000 ($1,500,000/10 years). The annual accounting profit is $100,000 + $150,000 = $250,000. The accounting rate of return is $250,000 / $1,500,000 = 16.67%.

Omaha Plating Corporation Is Considering Purchasing a Machine for $1,500,000