A company buys a machine for $76,000 that has an expected life of 6 years and no salvage value.The company uses straight-line depreciation.The company anticipates a yearly after tax net income of $1,805.What is the accounting rate of return?
A)2.85%.
B)4.75%.
C)6.65%.
D)9.50%.
E)42.75%.

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated by dividing the average annual profit by the initial investment cost. Here, the annual profit is $1,805. The machine costs $76,000 and has no salvage value, so it depreciates by $76,000 / 6 = $12,667 per year. However, depreciation is not considered in ARR calculations directly since it's about profit, not cash flow. The initial investment is $76,000. Therefore, ARR = ($1,805 / $76,000) * 100 = 2.375%. However, this calculation seems to misunderstand the given data or the formula application. Correctly, ARR should consider the average annual profit (after-tax net income) without needing to adjust for depreciation since it's already an after-tax figure. The correct calculation directly uses the given net income: ARR = ($1,805 / $76,000) * 100 = 2.375%, which doesn't match any of the provided options, indicating a potential mistake in the calculation or interpretation of the question as presented. Reevaluating for clarity: The correct approach for ARR is to divide the average annual profit by the average investment. Given no salvage value, the average investment is $76,000 / 2 = $38,000 (assuming straight-line depreciation and considering the investment's midpoint value). Thus, the correct ARR calculation wasn't accurately represented in the initial explanation. The correct formula for ARR is indeed (Annual net income / Initial investment) * 100, but with the provided options and the calculation mistake acknowledged, there seems to be a misunderstanding in applying the formula or a misinterpretation of the options provided.

A Company Buys a Machine for $76,000 That Has an Expected