Question 1 Horn Company is considering the purchase of a new machine for $108,00

Question

Question 1

Horn Company is considering the purchase of a new machine for $108,000.
The machine would replace an old piece of equipment that costs $41,830
per year to operate. The new machine would cost $25,720 per year to
operate. The old machine currently in use can be sold for $9,500 if
the new machine is purchased. The new machine would have a useful life
of ten years with a $6,000 salvage value.

Calculate the accounting rate of return on the machine that Horn Company
is considering buying. Enter your answer as a number followed by the
percentage symbol with no spaces in between (i.e., 29%).

Explanation / Answer

Initial Investment = Cost of New machin - sale value of old machin

= $108,000 - $9,500

Initial Investment= $98,500

Annual Depreciation = (Cost - Scrap value) / Useful Life

= ($108,000 - 6,000) / 10 Years

Annual Depreciation= $10,200

Cash Inflow

Annual Saving in cost to operate = Cost to operate old machin - new machin

= $41,830 - $25,720

Annual Saving in cost to operate = $16,110

Annual saving after depreciation = $16,110 - $10,200 (Depreciation)

Annual saving after depreciation= $5,910

Accounting Rate of Return = Average profit / Average Investment

= $5,910 / $98,500

Accounting Rate of Return= 6%

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