Question

11-7

A machine costs $400,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 8-year service life and a $80,000 salvage value, and it uses straight-line depreciation. Compute this machine's accounting rate of return. Accounting Rate of Return Choose Numerator: Accounting Rate of Return Accounting rate of return Choose Denominator:

Answer 1

Depreciation expense per year = ($ 400,000 - $ 80,000 ) $\div$ 8

Depreciation expense per year = $ 40,000

Accounting income = After tax net income + depreciation expense per year

Accounting income = $ 9000 + $ 40,000

Accounting income = $ 49,000

Average investment = ( Initial investment + Salvage value ) $\div$ 2

Average investment = ( $ 400,000 + $ 80,000 )  $\div$ 2

Average investment = $ 240,000

Accounting rate of return = ( Average income ) $\div$ Average investment

Accounting rate of return = ( $ 49,000 ) $\div$ ( $ 240,000)

Accounting rate of return = 20.42%