Question

Bridgeport Fashions needs to replace a beltloop attacher that currently costs the company \$34,000 in annual...

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%.)

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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