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Q7E

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Financial & Managerial Accounting
Found in: Page 1086
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

A machine costs $700,000 and is expected to yield an after-tax net income of $52,000 each year. Management predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return.

The accounting rate of return of the machine is 13.00%.

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Definition of depreciation

Depreciation is defined as the accounting process of allocating the cost of the asset to its useful life.

Step 2: Computation of accounting rate of return

Most popular questions for Business-studies Textbooks

Most Company has an opportunity to invest in one of two new projects. Project Y requires a $350,000 investment for new machinery with a four-year life and no salvage value. Project Z requires a $350,000 investment for new machinery with a three-year life and no salvage value. The two projects yield the following predicted annual results. The company uses straight-line depreciation, and cash flows occur evenly throughout each year.

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000 $280,000

Expenses

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,000 35,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000 42,000

Overhead including depreciation . . . . . . . . . . . . . . 126,000 126,000

Selling and administrative expenses . . . . . . . . . . . 25,000 25,000

Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000 228,000

Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 52,000

Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 15,600

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,000 $ 36,400

Required

1. Compute each project’s annual expected net cash flows. (Round the net cash flows to the nearest dollar.)

2. Determine each project’s payback period. (Round the payback period to two decimals.)

3. Compute each project’s accounting rate of return. (Round the percentage return to one decimal.)

4. Determine each project’s net present value using 8% as the discount rate. For part 4 only, assume that cash flows occur at each year-end. (Round the net present value to the nearest dollar.) Analysis Component

5. Identify the project you would recommend to management and explain your choice.

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