Average Accounting Return. Your firm is considering purchasing a machine with th

Question

Average Accounting Return. Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts.
Purchase Date Year 1 Year 2 Year 3 Year 4
Gross Investment $28,000.00 $28,000.00 $28,000.00 $28,000.00 $28,000.00
Less: Accumulated Depreciation $0.00 $7,000.00 $14,000.00 $21,000.00 $28,000.00
Net Investment $28,000.00 $21,000.00 $14,000.00 $7,000.00 $0.00




The machine generates, on average, $4300 per uear in additional net income.
a. What is the average accounting return for this machine?
b. What three flaws are inherent in this decision rule?

Explanation / Answer

a. Average Investment = 28000 / 4 = $7,000 Accounting Rate of Return = Average Income / Average Investment = 4300 / 7000 = 0.614 Average Investment = 28000 / 4 = $7,000 Accounting Rate of Return = Average Income / Average Investment = 4300 / 7000 = 0.614
b. Total Investment = 28000 Three Cash Flows = 28000 / 3 Minimum Cash Flow = $9,333.3 Soper year minimum $9,333 has to get. Then only we can accept this machine.... Thank you... Average Investment = 28000 / 4 = $7,000 Accounting Rate of Return = Average Income / Average Investment = 4300 / 7000 = 0.614

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