Accounting rate of return using initial investment


Problem:

Iverson Company is considering the purchase of a new machine. It will cost $270,000, last for 8 years, and have a zero terminal salvage value at the end of that time. If purchased, the machine is expected to increase revenues by $250,000 per year, but additional cash outlays to operate the machine will equal $200,000 per year.

Use straight-line depreciation and ignore income taxes.

Compute:

1. Net present value if the minimum desired rate of return is 10%

2. Payback period

3. Accounting rate of return using initial investment

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Finance Basics: Accounting rate of return using initial investment
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