Assume straight-line depreciation. A company plans to purchase machinery costing $1,000,000 with salvage value of $200,000 after 4 years. After-tax net income is expected to be $55,000, $40,000, $35,000, and $30,000 during the 4 years. Calculate the accounting rate of return. Round your answer to the nearest tenth of a percent.

Question

Hudson Rodgers

Business

11 May, 07:59

Assume straight-line depreciation. A company plans to purchase machinery costing $1,000,000 with salvage value of $200,000 after 4 years. After-tax net income is expected to be $55,000, $40,000, $35,000, and $30,000 during the 4 years. Calculate the accounting rate of return. Round your answer to the nearest tenth of a percent.

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Dalton Carey · Answer 1

Accounting rate of return = 6.67%

Explanation:

The accounting rate of return (ARR) is the proportion of the average investment that is earned as profit.

ARR = average operating income / Average investment

Average income = (55,000 + 40,000 + 35,000 + 30,000) / 4=40,000

Average investment = initial cost + salvage value/2

= 1,000,000 + 200,000/2 = 600,000

ARR = 40,000/600,000 * 100 = 6.67

Accounting rate of return = 6.67%