A company is considering purchasing a machine that costs $232000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $120000 and annual operating expenses exclusive of depreciation expense are expected to be $38000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is

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Business

Friendo

10 June, 23:03

A company is considering purchasing a machine that costs $232000 and is estimated to have no salvage value at the end of its 8-year useful life. If the machine is purchased, annual revenues are expected to be $120000 and annual operating expenses exclusive of depreciation expense are expected to be $38000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is

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Niko · Answer 1

45.69%

Explanation:

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

= Annual net income : average investment

where,

Net income is

= Annual revenues - annual operating expenses

= $120,000 - ($38,000 + $232,000 : 8 year)

= $120,000 - ($38,000 + $29,000)

= $53,000

And, the average investment would be

= (Initial investment) : 2

= ($232,000) : 2

= $116,000

Now put these values to the above formula

So, the rate would equal to

= $53,000 : $116,000

= 45.69%