McDonald Industries is considering the purchase of a $180,000 machine that is expected to result in a decrease of $20,000 per year in cash expenses.This machine,which has no residual value,has an estimated useful life of 15 years and will be depreciated on a straight-line basis.For this machine,the accounting rate of return would be

Question

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The Accounting Rate of Return (ARR) is calculated as the average annual profit divided by the initial investment. Here, the annual profit is the decrease in cash expenses, which is $20,000. The initial investment is $180,000. The ARR formula is: ARR = (Average Annual Profit / Initial Investment) * 100. The average annual profit is $20,000 (since the machine decreases expenses by this amount annually), and the initial investment is $180,000. Therefore, ARR = ($20,000 / $180,000) * 100 = 11.1%. However, the question seems to imply considering the average investment (initial investment/2) due to straight-line depreciation without residual value, which would be $180,000 / 2 = $90,000. Thus, ARR = ($20,000 / $90,000) * 100 = 22.2%. Given the options and the common interpretation of ARR calculation, it seems there was a misunderstanding in the calculation explanation. The correct calculation for ARR, considering the decrease in cash expenses as the return and the initial cost, should indeed result in 11.1% if considering the annual profit over the initial cost directly. However, the correct approach for ARR in this context, considering the average investment due to depreciation, leads to the answer provided. My explanation initially aimed to correct for a perceived mistake but ended up adding confusion due to a misinterpretation of the ARR formula's application in this scenario. The correct ARR, based on the decrease in cash expenses and the initial cost without considering depreciation in the calculation, would indeed be 11.1%, aligning with the formula: ARR = (Annual profit / Initial investment) * 100. However, given the options and typical calculation methods, the intended answer seems to be based on a different interpretation or calculation method.

McDonald Industries Is Considering the Purchase of a $180,000 Machine