is considering the purchase of a machine to produce a new product. The machine will cost the business £250,000 and has an expected life of four years. Annual operating profits from the machine are expected to be as follows:

                       Operating profits £ 

Year 1                         30,000 

Year 2                        43,000 

Year 3                         23,000 

Year 4                         15,000 

The new machine will be depreciated using the straight-line method and the estimated disposal value at the end of its useful life is £10,000. The business has a target accounting rate of return of 18% for new investment projects.       

Required

1. Calculate the accounting rate of return for the new machine.       

2. Should the machine be purchased?

Answer rating: 100% (QA)

To calculate the accounting rate of return for the new machine we need to determine the average annu... View the full answer