Question

Jolly Company is considering investing $ 33,000 in a new machine. The machine is expected to last five years and to have a salvage value of $ 8,000. The straight-line method of depreciation is used. Annual after-tax net cash inflow from the machine is expected to be $ 7,500. Calculate the annual depreciation, after-tax net income, average investment, and accounting or unadjusted rate of return.  

Answer 1

Req 1:
Annual depreciation:
Cost of machhine		33000
less: salvage		8000
Depreciable amount		25000
Divide: life		5
Annual depreciation:		5000
Req 2:
After tax net inflows		7500
Less: Annual depreciation		5000
Annual net income after tax		2500
Req 3:
Cost of machine		33000
Add: salvage value		8000
Total		41000
Average investment		20500
(41000/2)
Rreq 4:
Accounting rate of return: Net income after tax/ Average Investment* 100
		2500 /20500 *100 = 12.195%