Question

The production department is proposing the purchase of an automatic insertion machine. It has identified three...

The production department is proposing the purchase of an automatic insertion machine. It has identified three machines and has asked the accountant to analyze them to determine the best average rate of return. Which machine has the best average rate of return?

Machine A Machine B Machine C
Estimated average annual income $48,582.10 $79,533.30 $66,447.00
Average investment $347,015.00 $265,111.00 $442,980.00

a.Machine C

b.Machine A

c.Machine B

d.Machine A or B

Business   Accounting   
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Homework Answers

Answer #1

The formula for average rate of return is derived by dividing the average annual net earnings on the investment by the original investment or the average investment during the life of the project.

Average rate of return = Estimated annual income / Average investment *100

Average rate of return of

Machine A = 48582.1/347015 *100

= 14%

Machine B = 79533.3/265111 *100

= 30%

Machine C = 66447/442980 *100

= 15%

The answer is option c. Machine B has the best average rate of return.

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