# A company is planning to purchase a machine that will cost $30,600 with a six-year life and no...

## Question:

A company is planning to purchase a machine that will cost $30,600 with a six-year life and 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.

Sales | $98,000 | |

Costs: | ||

Manufacturing | $50,500 | |

Depreciation on machine | $5,100 | |

Selling and administrative expenses | $38,000 | $(93,600) |

Income before taxes | $4,400 | |

Income tax (30%) | $(1,320) | |

Net income | $3,080 |

Required:

What is the accounting rate of return for this machine?

## Accounting Rate of Return:

Accounting rate of return is one of the capital budgeting techniques that does not consider the time value of money concept while evaluating Investments. The formula to calculate the accounting rate of return is:

{eq}Accounting \ rate \ of \ return \ = \ \dfrac{Net \ income}{Average \ investment} \ \times \ 100 {/eq}

## Answer and Explanation: 1

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View this answerAccounting rate of return for this machine is $20.13.

Calculation is shown below:

{eq}Average \ investment \ = \ \dfrac{Machine \ costs \ + \...

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Chapter 14 / Lesson 8Capital 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.

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