A company bought a machine that has an expected life of six years and no salvage value.Management estimates that this machine will generate annual after-tax net income of $700.If the accounting rate of return is 10%,what was the purchase price of the machine?
A) $7,000
B) $700
C) $28,000
D) $14,000
E) $3,500

Question

Quizplus · Accepted Answer

Accounting rate of return = $700/ [(Purchase price + 0)/2] = 10%
Annual average investment = $700/.10 = $7,000
(Purchase price + 0)/2 = $7,000
Purchase price = 7,000 x 2 = $14,000

A Company Bought a Machine That Has an Expected Life