Olsen Inc purchased a 540000 machine to manufacture a specia

Olsen Inc. purchased a $540,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Olsen can sell all that it could manufacture for the next 8 years. The government exempts taxes on profits from new investments in order to encourage capital investments. This legislation most likely will remain in effect in the foreseeable future. The equipment is expected to have 8 years of useful life with no salvage value. The firm uses straight-line depreciation. The net cash inflow is expected to be $131,400 each year. Olsen uses a discount rate of 10.00% in evaluating its capital investments. Assume that cash inflows occur evenly throughout the year The estimated accounting rate of return value for this proposed investment, is A. B. C. D. E. 12.2% 11.2% 12.0% 11.8% 12.9%

Solution

Annual net income = 131400-(540000/8)= $63900 Accounting rate of return = 63900/540000= 11.8% Option D is correct