What is the average accounting rate of return (ARR) on a piece of equipment that will cost
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What is the average accounting rate of return (ARR) on a piece of equipment that will cost $1.2 million and that will result in pretax cost savings of $380,000 for the first three years and then $280,000 for the following three years? Assume that the machinery will be depreciated to a salvage value of 0 over 6 years using the straight-line method and the company’s tax rate is 32 percent. If the acceptance decision is based on the project exceeding an ARR of 20 percent, should this machinery be purchased?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Fundamentals of Corporate Finance
ISBN: 978-1119371403
4th edition
Authors: Robert Parrino, David S. Kidwell, Thomas Bates
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