A company is planning to purchase a machine that will cost $24,000, have a 6-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 net cash flows per year of $6,000.
The average rate of return for the machine is 16.7%. True or False?
Average Accounting Rate of Return:
Average accounting rate of return is found out by dividing the total rate of return over life of the asset by \life of the asset. Total rate of return over life of the project is found out dividing the total income earned over life of the asset by total initial investment in the asset.
Answer and Explanation:
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fromChapter 9 / Lesson 4
Average accounting return (AAR) is the rate of return of an investment calculated by dividing average profit by average investment. Practice calculating AAR, and see the weaknesses in evaluations using only this formula.