1)

A company is planning to purchase a machine that will cost $30,600, have a six-year life, and be depreciated over a three-year period with no salvage value. The company expects to sell the machine's output of 3,000 units evenly throughout each year. A projected income statement for each year of the asset's life appears below. What is the accounting rate of return for this machine?

Sales		$123,000
Costs:
Manufacturing	$53,100
Depreciation on machine	5,100
Selling and administrative expenses	41,000	(99,200)
Income before taxes		$23,800
Income tax (30%)		(7,140)
Net income		$16,660

108.89%.

50.00%.

54.44%.

33.33%.

5.10%.

2)

Alfarsi Industries uses the net present value method to make investment decisions and requires a 15% annual return on all investments. The company is considering two different investments. Each require an initial investment of $14,400 and will produce cash flows as follows:

End of Year	Investment
	A	B
1	$9,600	$0
2	9,600	0
3	9,600	28,800

The present value factors of $1 each year at 15% are:

1	0.8696
2	0.7561
3	.6575

The present value of an annuity of $1 for 3 years at 15% is 2.2832 The net present value of Investment A is:

$18,936.

$(14,400).

$14,400.

$(21,919).

$7,519.

3)

Paxton Company can produce a component of its product that incurs the following costs per unit: direct materials, $10.80; direct labor, $14.80, variable overhead, $3.80 and fixed overhead, $8.80. An outside supplier has offered to sell the product to Axle for $38.20. Compute the net incremental cost or savings of buying the component.

$8.80 savings per unit.

$3.80 cost per unit.

$0 cost or savings per unit.

$8.80 cost per unit.

$4 savings per unit.

4)

Granfield Company has a piece of manufacturing equipment with a book value of $36,000 and a remaining useful life of four years. At the end of the four years the equipment will have a zero salvage value. The market value of the equipment is currently $21,200. Granfield can purchase a new machine for $112,000 and receive $21,200 in return for trading in its old machine. The new machine will reduce variable manufacturing costs by $18,200 per year over the four-year life of the new machine. The total increase or decrease in net income by replacing the current machine with the new machine (ignoring the time value of money) is:

$18,000 increase

$72,800 decrease

$14,800 decrease

$49,200 increase

$18,000 decrease