Computation of accounting rate of return and depreciation.
Accounting rate of I'9turn, payback, and NPV Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return melhoc!. A recent proposal involved a $50,{)(H) investment in a macramé that had an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net income (and cash knows) before depreciation expense by $J5,000 per year. The criteria for approving a new investment are that it has a rate of return of 16% and a payback period of three years or less.
Required:
Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain your answer.