Question:
Assume straight-line depreciation. A company plans to purchase machinery costing $1,000,000 with salvage value of $200,000 after 4 years. Annual income is expected to be $40,000 during the 4 years. Calculate the accounting rate of return. Round your answer to the nearest tenth of a percent.
Answer:
Machinery cost = $1,000,000
Salvage value = $200,000
Life = 4 years
Net income after tax
Year 1 = $55,000
Year 2 = $ 40,000
Year 3 = $ 35,000
Year 4 = $ 30,000
Total = $ 160,000
Average profit $40,000
Average investment =$($200,000 + $1,000,000) ÷ 2
= $1,200,000 / 2
= $600,000
ARR = Average profit ÷ Average Investment
= $(40000 ÷ 600,000) * 100
= 6.67%
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