Question

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 which one has the best average rate of return. Machine A Machine B Machine C Estimated average income $40,000 $50,000 $75,000 Average investment 300,000 250,000 500,000

Answer 1

Answer:

Machine B

Explanation:

The formula to compute the accounting rate of return is shown below:

= Annual net income ÷ average investment

For Machine A, it would be

= $40,000 ÷ $300,000

= 13.33%

For Machine B, it would be

= $50,000 ÷ $250,000

= 20%

For Machine C, it would be

= $75,000 ÷ $500,000

= 15%

The higher the average rate of return the best is the machine. So, the Machine B has best average rate of return