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17 November, 14:31

A company is planning to purchase a machine that will cost $26,400 with a six-year life and no salvage value. The company uses straight-line depreciation. 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? Sales $ 93,000 Costs: Manufacturing $ 50,000 Depreciation on machine 4,400 Selling and administrative expenses 33,000 (87,400) Income before taxes $ 5,600 Income tax (40%) (2,240) Net income $ 3,360

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  1. 17 November, 15:19
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    21.2%

    Explanation:

    The formula to compute the accounting rate of return is shown below:

    = Annual accounting profit : average investment

    where,

    Annual accounting profit is $5,600

    And, the average investment would be $26,400

    Now put these values to the above formula

    So, the rate would equal to

    = $5,600 : $26,400

    = 21.2%

    we simply divide the annual accounting profit by the average investment so that correct accounting rate of return can come
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