A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's after-tax net income, based on a tax rate of 40%, is $2,400. What is the approximate accounting rate of return for the machine?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual after-tax net income divided by the initial investment. Here, the after-tax net income is $2,400, and the initial investment is $48,000. ARR = ($2,400 / $48,000) * 100% = 5%. However, considering the depreciation adjustment, the correct ARR is approximately 10%.

A Company Is Considering the Purchase of a New Machine