A company is planning to purchase a machine that will cost $24,000, have a six-year life, and have no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. Total income over the life of the machine is estimated to be $12,000. The machine will generate cash flows per year of $6,000. The accounting rate of return for the machine is 16.7%.

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual income by the initial investment. In this case, the average annual income is $12,000 / 6 = $2,000. The initial investment is $24,000. Therefore, the accounting rate of return is $2,000 / $24,000 = 16.7%.

A Company Is Planning to Purchase a Machine That Will