Pique Corporation wants to purchase a new machine for $300,000.Management predicts that the machine can 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 no residual value for all depreciable assets.Pique's tax rate is 40%.Management requires a minimum 10% rate of return on all investments.What is the annual book (accounting)rate of return based on the initial investment?

Question

Quizplus · Accepted Answer

The annual book rate of return is calculated as the average annual profit divided by the initial investment. The annual profit is the sales minus expenses and taxes. Depreciation is $60,000 per year ($300,000/5 years). The profit before tax is $60,000 ($200,000 - $80,000 - $60,000). After 40% tax, the profit is $36,000. The book rate of return is $36,000 / $300,000 = 12%.

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