Calculation of before-tax return on capital employed
Total net before-tax cash flow = 122 + 143 + 187 + 78 = $530000
Total depreciation = 250000 - 5000 = $245000
Average annual accounting profit = (530 - 245)/ 4 = $71,250
Average investment = (250000 + 5,000)/ 2 = $127500
Return on capital employed = 100 × 71250/ 127500 = 56%
Specified the target return on capital employed of Trecor Co is 20% and the ROCE of the investment is 56% the purchase of the machine is recommended.