Exercise 25-4 Accounting rate of return LO P2 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.

Exercise 25-4 Accounting rate of return LO P2

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.

Explanation: Average investment = $700,000 + $100,000 =  $400,000 2 Accounting rate of return = Annual after-tax net income Annual average investment Accounting rate of return = $52,000 / $400,000 = 13.0%