Quip Corporation Wants to Purchase a New Machine for $300,000

question 164

Multiple Choice

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the annual accounting (book) rate of return (ARR) for the proposed investment, based on the initial investment? (Round answer to nearest whole percentage.)

• A) 12%.
• B) 14%.
• C) 17%.
• D) 20%.
• E) 24%.

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Definitions:

Quantity of Labor

The total number of labor hours employed in the production of goods and services over a specific period.

Resource Use

Refers to the way in which human societies utilize natural resources to fulfill their needs and wants.