Question
Asked Nov 25, 2019
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  1.  Assume that management is evaluating the purchase of a new machine as follows:
  • Cost of new machine: $800,000
  • Residual value: $0
  • Estimated total income from machine: $300,000
  • Expected useful life: 5 years

The average rate of return of a new equipment is _____.

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Expert Answer

Step 1

Accounting rate of return method: Accounting rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average net income as a percent of the initial investment of the business, and it is also known as the average rate of return.

 

Step 2

Working note:

Calculate the average annual return

...
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Estimated total income of machine Average annual return Estimated useful life $300, 000 5 years $60,000

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