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27 March, 21:25

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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  1. 27 March, 21:29
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    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%
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