A company is considering the purchase of a new machine for $48,000.Management predicts that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials,direct labor,and factory overhead totaling $8,000 per year plus straight-line depreciation of $4,000 per year.The company's after-tax net income,based on a tax rate of 40%,is $2,400.What is the approximate accounting rate of return for the machine?
A)13%.
B)17%.
C)8%.
D)27%.
E)10%.

Question

Quizplus · Accepted Answer

The approximate accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The average annual profit is the after-tax net income, which is $2,400. The initial investment is $48,000. Therefore, ARR = ($2,400 / $48,000) * 100% = 5%. However, this calculation seems to overlook the correct approach to ARR, which typically involves the average annual operating income (before taxes) or net income (after taxes) divided by the average investment. Given the provided choices and the context, it seems there might be a misunderstanding in the calculation or the provided options. Re-evaluating with the correct formula for ARR which considers the average annual operating income before taxes and the initial investment cost, the correct calculation should involve the operating income before taxes. However, without the explicit calculation steps leading to the options, there's a discrepancy in the explanation. The correct approach to find ARR involves dividing the average annual profit (before taxes) by the initial cost of the investment or the average investment amount.

A Company Is Considering the Purchase of a New Machine