Jensen Manufacturing is considering buying an automated machine that costs $500,000. It requires working capital of $50,000. Annual cash savings are anticipated to be $206,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $20,000. The working capital will be recovered at the end of the machine's life.
Required:
Compute the accrual accounting rate of return based on the initial investment.

Question

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The Answer of Jensen Manufacturing is considering buying an automated machine that costs $500,000. It requires working capital of $50,000. Annual cash savings are anticipated to be $206,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $20,000. The working capital will be recovered at the end of the machine's life.
Required:
Compute the accrual accounting rate of return based on the initial investment.

Jensen Manufacturing Is Considering Buying an Automated Machine That Costs