A company bought a machine that has an expected life of seven years and no salvage value.Management estimates that this machine will generate annual after-tax net income of $540.If the accounting rate of return is 12%,what was the purchase price of the machine?
A) $4,500
B) $540
C) $31,500
D) $9,000
E) $2,250

Question

Quizplus · Accepted Answer

Accounting rate of return = $540/ [(Purchase price + 0)/2] = 12%
Annual average investment = $540/.12 = $4,500
(Purchase price + 0)/2 = $4,500
Purchase price = 4,500 x 2 = $9,000

A Company Bought a Machine That Has an Expected Life