Question

Part A Kelisen Ltd recently purchased a new dyeing machine for $100,000. Management expects the dyeing machine to generate the following additional revenues and expenses during its useful life. Average incremental revenue $50,000 per year Average incremental expenses (depreciation not included) $20,000 per year The dyeing machine has an expected life of 6 years and is depreciated using the straight line method You are required to: a) Prepare a schedule showing the incremental revenue, incremental operating expenses and incremental depreciation during each of the next 6 years b) Calculate the accounting rate of return on the dyeing machine, using the initial investment as the denominator.

Answer 1

a)

Year	Incremental revenue	Incremental expenses	Incremental depreciation	Incremental profit
1	50,000	20,000	16667	13,333
2	50,000	20,000	16667	13,333
3	50,000	20,000	16667	13,333
4	50,000	20,000	16667	13,333
5	50,000	20,000	16667	13,333
6	50,000	20,000	16667	13,333

b) Accounting rate of return = 13,333/ 100,000 = 13.33%