Accounting Rate of Return Method
Eco Wet, Inc., a manufacturer of gears for lawn sprinklers, is thinking about adding a new fully automated machine. This machine can produce gears that the company now produces on its third shift. The machine has an estimated useful life of ten years and will cost $500,000. The residual value of the new machine is $50,000. Gross cash revenue from the machine will be about $420,000 per year, and related operating expenses, including depreciation, should total $400,000. Depreciation is estimated to be $80,000 annually. Management has decided that only capital investments that yield at least an 8 percent return will be accepted.
Using the accounting rate of return method, decide whether the company should invest in the machine.
SelectYes, invest in the machineNo, do not invest in the machineItem 1
Round your accounting rate of return answer to one decimal place.
| Average investment cost | $ | |
| Average annual net income | $ | |
| Accounting rate of return | % |