A company is planning to purchase a machine that will cost $30,000, have a six year life and be depreciated over a have a the machine's output of 3,000 three-year period with no salvage value. The company expects to sell units evenly throughout each year. A projected Income statement for each year of the assets life appears below. What accounting rate of return for this machine?
|Depreciation on machine||5,000|
|Selling and administrative expenses||40,000||(98,000)|
|Income before taxes||$22,000|
|Income tax (35%)||(7700)|
Accounting Rate of Return:
The accounting rate of return is another method of measuring the profitability of a project or investment. However, this method does not take into consideration the effects of the cash flow and the time value of money.
Answer and Explanation:
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fromChapter 14 / Lesson 8
Capital budgets are used for large projects completed over long timelines and can be evaluated using the accounting rate of return (ARR) comparing the average rate of return to investments. Learn how the desired and actual ARR are calculated and guide future budget decisions.