This is Accounting 2

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Business Finance

Description

A company is considering the purchase of a new machine for $27,200. Management predicts that the machine can produce sales of $10,400 each year for the next 10 years. Expenses are expected to include direct materials, direct labor, and factory overhead totaling $5,300 per year plus depreciation of $2,800 per year. The company's tax rate is 40%. What is the approximate accounting rate of return for the machine?

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Explanation & Answer

Hi there! Thank you for the opportunity to help you with your question!

The accounting income is given by (10400 - (5300+2800)) = 2300

Yearly, that averages out to 2300/10 = 230

Considering tax: 230 * 60% =  138

Divide it by initial investment for ARR: 138/27200 = 0.51%

Please let me know if you need any clarification. Always glad to help!


Anonymous
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