A machine costs $500,000 and is expected to yield an after-tax net income of $19,000 each year. Management predicts this machine has a 9-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 = $500,000 + $100,000 = $300,000 2 Accounting rate of return = Annual after-tax net income Annual average investment Accounting rate of return = $19,000 / $300,000 = 6.33%

A machine costs $500,000 and is expected to yield an after-tax net income of $19,000 each year. Management predicts this machine has a 9-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	=	$500,000 + $100,000	=	$300,000
		2

Accounting rate of return =	Annual after-tax net income
	Annual average investment

Accounting rate of return = $19,000 / $300,000 = 6.33%