A company is considering purchasing a machine that costs $280,000 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 $100,000 and annual operating expenses exclusive of depreciation expense are expected to be $38,000. The straight-line method of depreciation would be used. If the machine is purchased, the annual rate of return expected on this machine is
A) 22.1%.
B) 44.3%.
C) 9.6%.
D) 19.3%.

Question

Quizplus · Accepted Answer

First, we need to calculate the annual depreciation expense. Since the machine is purchased for $280,000 and has no salvage value at the end of its useful life, the annual depreciation expense would be:

($280,000 - $0) / 8 years = $35,000 per year

Next, we need to calculate the annual net income, which is the annual revenues minus the annual operating expenses and annual depreciation expense:

$100,000 - $38,000 - $35,000 = $27,000

To calculate the annual rate of return, we need to divide the annual net income by the initial investment (the cost of the machine):

$27,000 / $280,000 = 0.0964 or 9.64%

Therefore, the annual rate of return expected on this machine is 9.6%. Option C is the correct choice.

A Company Is Considering Purchasing a Machine That Costs $280,000