5. Gattis Ice Cream, situated in Lansdowne Road, Athlone, wants to replace an old ice-cream machine with a new machine. The old machine has no residual value. The new machine would increase annual revenue by R350,000 and annual operating expenses by R150,000. The new machine would cost R390,000. The estimated useful life of the machine is 10 years with zero salvage value.

a. Compute the accounting rate of return (ARR) of the machine using the above information. (5 Marks)

b. Should Gattis purchase the machine if management wants an accounting rate of return of 13% on all capital investments? Explain why. (2 Marks)