Question

A machine costs \(700,000 and is expected to yield an after-tax net income of \)52,000 each year. Management predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return.

Short answer

The accounting rate of return of the machine is 13.00%.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of depreciation

Depreciation is defined as the accounting process of allocating the cost of the asset to its useful life.

Computation of accounting rate of return

$$\begin{gathered} \mathbf{Accounting}\mathbf{}\mathbf{rate}\mathbf{}\mathbf{of}\mathbf{}\mathbf{return}\mathbf{=}\frac{\mathrm{Annual}\mathrm{after}\mathrm{tax}\mathrm{netincome}}{\mathrm{Annual}\mathrm{average}\mathrm{investment}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\$52,000}{\$400,000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{13}\mathbf{.}\mathbf{00}\mathbf{\%} \end{gathered}$$