A machine costs $300,000 and is expected to yield an after-tax net income of $9,

Question

A machine costs $300,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 12-year service life and a $60,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return.

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $216,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 86,400 units of the equipment’s product each year. The expected annual income related to this equipment follows.

1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.

Accounting Rate of Return Choose Numerator: / Choose Denominator: = Accounting Rate of Return / = Accounting rate of return 0

Explanation / Answer

Accounting Rate of Return = Net income / Investment

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Cash inflows related to the equipment = Net income + Depreciation

= 18,900 + 18,000 = 36,900

1.

Pay back period = Initial investment / Expected Annual net cash flow

2.

Accounting Rate of Return = Net income / Investment

Choose Numerator Choose Denominator Accounting rate of Return Net income Investment Accounting rate of return 9,000 300,000 3%

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