Question

A company is considering the purchase of a new machine for $48,000. Management predicts that the machine can produce sales of $16,000 each year for the next 10 years.Expenses are expected to include direct materials, direct labor, and factory overhead totaling $8,000 per year plus depreciation of $4,000 per year. The company's taxrate is 40%. What is the approximate Accounting Rate of Return for the machine?


13%.
17%.
8%.
27%.
10%.

Answer 1

The time period that is required for the net after-tax cash inflows to recover the initial investment in
a project is considered the payback period. If cash flows come in at the expected amount until the
year of payback, the project will have returned its initial investment.

formula for calculating the payback period is as follows:
Payback period = Net initial investment / Increase in annual net after-tax cash flow

Net Initial Investment = $ 48,000
Tax paid for the year (CASH OUT FLOW) = [$16,000 (sales) - $8,000 (other expenses) - $4,000 (Depreciation Expense)] * Tax Rate (40%)

= 4,000 * 40% = 1,600

Annual Cash In Flow = Sales - Paid Expenses - Tax Paid
= $16,000 - $8,000 - $ 1,600 = $6,400


ARR = Annual Cash In Flow/Net Initialinvestment = $6,400/$48,000 =
13.33%

So Accounting Rate of Return is 13%