A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. The machine has no salvage value. What is the approximate accounting rate of return?

Question

Business

Kyle

19 April, 08:45

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. The machine has no salvage value. What is the approximate accounting rate of return?

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Answers (1)

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Jaylon Stokes · Answer 1

rate of return 2.38%

Explanation:

accounting RoR = net annual profit / investment

for this rate, any annual cost, depreciation included must be subtracted from the revenue.

for fixed assets we should subtract the depreciation expense

2,000 - 1,500 = 500 net annual profit

500 / 21,000 = 0.023809523 = 2.3809523% = 2.38