A manufacturer is considering the purchase of a new manufacturing machine. The m

Question

A manufacturer is considering the purchase of a new manufacturing machine. The machine is expected to save $6,250 per year and it costs $17,000 to purchase. The expected useful life of the machine is 4 years and there is no expected residual value at the end of the 4 years. The minimum acceptable rate of return is 10%.

A)How much depreciation expense should be charged annually against the machine using a straightline basis? (round to nearest dollar, no dollar sign)

B)What is the accounting rate of return of this purchase? (expressed as a percent, no percentage sign, rounded to one decimal)

Explanation / Answer

1. Straight line depreciation = Purchase value of the machine - salvage value / useful life

= 17000 - 0/4 = 4250

2. Accountign rate of return

= Incremental net operating income / initial investment

= Incremetal revenues - incremental expenses / initial investment

= 6250 - 4250 / 17000

= 2000 /17000 = 11.76

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