A company is planning to purchase a machine that will cost $24,000, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine?
A) 33.3%.
B) 16.7%.
C) 50.0%.
D) 8.3%.
E) 4%.

Question

Quizplus · Accepted Answer

To calculate the accounting rate of return (ARR), we need to divide the average annual net income by the initial investment.

Initial investment = $24,000 
Total net income over three years = $17,400 + $9,600 + $1,800 = $28,800
Average annual net income = $28,800 / 3 = $9,600

ARR = ($9,600 / $24,000) x 100% = 40%

Therefore, the accounting rate of return for this machine is 16.7% (not one of the answer choices provided in the question, but calculated as shown above).

A Company Is Planning to Purchase a Machine That Will