ABC Company is considering the purchase of a new machine for $113,000. The machi

Question

ABC Company is considering the purchase of a new machine for $113,000. The machine would replace an old piece
of equipment that costs $35,000 per year to operate. The new machine would cost $15,000 per year to operate. The
old machine currently in use has no resale value. The new machine would have a useful life of ten years with zero
salvage value. ABC Company employs a cost of capital of 14% on all capital projects. The accounting rate of
return on the new machine is closest to:

Question 2 options:

A) 20.9% B) 17.7% C) 15.9% D) 7.7% E) 30.9%

Explanation / Answer

B) 17.7% Cost of new Machine                113,000.00 Cost of new Machine to operate                  15,000.00 Cost of old Machine to operate                  35,000.00 Cost savings on new machine per year                  20,000.00 ARR = Avg Acc Profit/Avg Invt ARR = 20,000/113,000 ARR = 17.70%

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