A company buys a machine for $68,000 that has an expected life of 8 years and no
ID: 2528282 • Letter: A
Question
A company buys a machine for $68,000 that has an expected life of 8 years and no salvage value. The company anticipates a yearly net income of $3,250 after taxes of 36%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?
3.44%.
4.78%.
9.56%.
6.12%.
38.24%.
Maxim manufactures a cat food product called Green Health. Maxim currently has 10,000 bags of Green Health on hand. The variable production costs per bag are $1.80 and total fixed costs are $10,000. The cat food can be sold as it is for $9.00 per bag or be processed further into Premium Green and Green Deluxe at an additional $2,000 cost. The additional processing will yield 10,000 bags of Premium Green and 3,000 bags of Green Deluxe, which can be sold for $8 and $6 per bag, respectively. If Green Health is processed further into Premium Green and Green Deluxe, the total gross profit would be:
A company buys a machine for $68,000 that has an expected life of 8 years and no salvage value. The company anticipates a yearly net income of $3,250 after taxes of 36%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?
Explanation / Answer
Annual net income = 3,250
Investment = 68,000
Accounting rate of return = Annual net income / Investment
= 3,250 / 68,000
= 4.78%
------------------------------------------------------------------------
Revenues = 10,000 bags of Premium Green * 8 per bag + 3,000 bags of Green Deluxe * 6 per bag
= 98,000
Initial costs = Variable costs + Fixed costs
= (10,000 * 1.8) + 10,000
= 28,000
Additional processing cost = 2,000
Total costs = Intial costs + Furthr processing costs
= 28,000 + 2,000 = 30,000
Total groos profit = Revenues - Total costs
= 98,000 - 30,000
= 68,000
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