You have been asked to analyze a capital investment project for a new machine. The machine will cost $400,000, have an 8-year life and a salvage of $80,000. The new machine will generate annual net cash flows of $120,000. The accounting rate of return for the first year of using the new machine is:

14%

Explanation:

Net cash flow = $120,000

Annual Depreciation = [(Cost + Salvage value) / Useful life]

Annual Depreciation = [($400000 + 80000) / 8 years]

Annual Depreciation = $64,000

Net Income = Net cash flows - Annual Depreciation

Net Income = $56,000

Investment amount = $400,000

Accounting rate of return = Net Income / Investment amount

Accounting rate of return = $56,000 / $400,000

Accounting rate of return = 14%

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