Question

Bridgeport Fashions needs to replace a beltloop attacher that
currently costs the company $34,000 in annual cash operating costs.
This machine is of no use to another company, but it could be sold
as scrap for $2,160. Managers have identified a potential
replacement machine, Euromat’s Model HD-435.

The HD-435 is priced at $64,104 and would cost Bridgeport Fashions
$24,000 in annual cash operating costs. The machine has a useful
life of 12 years, and it is not expected to have any salvage value
at the end of that time.

**(d)** Calculate the accounting rate of return on
the HD-435. **(Round answer to 2 decimal places, e.g.
11.25%.)**

Answer #1

Ans (d). Calculation of Accounting rate of return on the HD-435

ARR = Average net profit/Average net investment

Step:1 Calulation of Average net investment

Cost of HD-435 = 64104

Less: Scrap value Beltloop Attacher = (2160)

Net cost of HD-435 = 61944

Step: 2 Calculation of net saving

Annual operating cost of Beltloop attacher = 34000

Less: annual cost HD-435 = (24000)

Net saving = 10000

**Accounting rate of Return = 10000/61944X100 =
16.14%**

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Machine name
AC 1
AC 2
Purchase price
$40,000
$60,000
Operating cost (end of each year)
$17,000
$8,000
Useful life (years)
4
6
Straight line depreciation to zero over (years)
4
6
Salvage value at end of useful life
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$0
The relevant discount rate is 10% and the marginal tax rate is
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Current Machine
New Machine
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$300,000
Repair costs needed now
220,000
Annual cash operating costs
100,000
80,000
Current salvage value
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Salvage value in five years
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Required:
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The Fairmont Hotel in San Francisco needs to replace its air
conditioning system. There are two alternatives, both of which can
do the job equally well:
Machine name
AC 1
AC 2
Purchase price
$40,000
$60,000
Operating cost (end of each year)
$18,000
$8,000
Useful life (years)
4
5
Straight line depreciation to zero over (years)
4
5
Salvage value at end of useful life
$0
$0
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Additional Exercise 195
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Current Copier
New Model
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$20,000
Accumulated depreciation
8,000
—
Estimated operating costs (annual)
7,000
2,600
Useful life
5 years
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Click here to view the factor table.
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Exercise 23-12 Keep or replace LO A1
Xinhong Company is considering replacing one of its
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