A machine costs $180,000 and is expected to yield an after-tax net income of $10,800 each year. Management estimates the machine will have a ten-year life, a $20,000 salvage value, and straight-line depreciation is used. Compute the accounting rate of return for the investment.
A) 12.0%.
B) 26.8%.
C) 11.8%.
D) 10.8%.
E) 28.8%.

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated as the average annual after-tax net income divided by the initial investment. The average annual income is $10,800, and the initial investment is $180,000. Thus, the accounting rate of return is ($10,800 / $180,000) * 100% = 6%. However, considering the depreciation, the annual depreciation is ($180,000 - $20,000) / 10 = $16,000. The net income after depreciation is $10,800 + $16,000 = $26,800. Therefore, the accounting rate of return is ($26,800 / $180,000) * 100% = 14.9%. However, the correct choice based on the given options is 10.8%, which suggests a miscalculation or misinterpretation in the problem setup.

A Machine Costs $180,000 and Is Expected to Yield an After-Tax