Jett Company is considering the purchase of a new machine that will cost $130,00

Question

 Jett Company is considering the purchase of a new machine that will cost $130,000. The machine would replace an old piece of equipment that the company currently uses in its operations. The new machine will generate net cash inflows of $24,255 each year during its 15-year useful life and has a $7,000 salvage value at the end of the 15 years. The old machine currently in use can be sold for $6,500 if the new machine is purchased.  Calculate the accounting rate of return on the new machine. Enter your answer as a whole number (i.e., 6). Do not enter your answer as a decimal (i.e., .06) or as a percentage (i.e., 6%).

Explanation / Answer

Annual Depreciation = (Initial Investment ? Scrap Value) ÷ Useful Life in Years Annual Depreciation = ($130,000 ? $7,000) ÷ 15 ? $8,200 Average Accounting Income = Annual cash flows- Annual Depreciation Average Accounting Income = $24,255 ? $8,200 = $16,055 Accounting Rate of Return = Average Accounting income / Average investment Accounting Rate of Return = $16,055 ÷ $130,000 ? 12.35

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