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15 June, 21:49

A company is considering purchasing a machine for $21,000. The machine will generate an after-tax net income of $2,000 per year. Annual depreciation expense would be $1,500. The machine has no salvage value. What is the approximate accounting rate of return?

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  1. 15 June, 22:00
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    rate of return 2.38%

    Explanation:

    accounting RoR = net annual profit / investment

    for this rate, any annual cost, depreciation included must be subtracted from the revenue.

    for fixed assets we should subtract the depreciation expense

    2,000 - 1,500 = 500 net annual profit

    500 / 21,000 = 0.023809523 = 2.3809523% = 2.38
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