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24 May, 03:56

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's after-tax net income, based on a tax rate of 40%, is $2,400. What is the approximate accounting rate of return for the machine?

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  1. 24 May, 04:02
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    Accounting rate of return is 10%

    Explanation:

    Given data

    new machine = $48,000

    sales = $16,000

    time = 10 year

    depreciation = $4,000 / year

    factory overhead = $8,000 + depreciation $4,000

    net income = $2400

    tax rate = 40%

    to find out

    accounting rate of return for the machine

    solution

    we know that

    Accounting rate of return = after tax net income / average investment

    so here we know net income after tax = $2400

    so we find investment first

    Average investment = (Initial investment) / 2

    Average investment = 48000 / 2 = $24000

    so

    Accounting rate of return = after tax net income / average investment

    Accounting rate of return = 2400 / 24000 = 0.1 = 10%

    Accounting rate of return is 10%
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