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INFORMATION Leo Limited intends purchasing a new machine and has a choice between two machines viz. Machine A and Machine B. The following forecasts were
INFORMATION Leo Limited intends purchasing a new machine and has a choice between two machines viz. Machine A and Machine B. The following forecasts were made pertaining to these two machines:
Machine A | Machine B | |
Initial Cost | 400 000 | 400 000 |
Expected Useful Life | 5 years | 5 years |
Scrap value | 50 000 | 0 |
Annual Depreciation | 70 000 | 80 000 |
Required Rate of return | 12% | 12% |
Expected annual net profit | R | R |
Year 1 | 40 000 | 50 000 |
Year 2 | 30 000 | 50 000 |
Year 3 | 60 000 | 50 000 |
Year 4 | 70 000 | 50 000 |
Year 5 | 20 000 | 50 000
|
2 Calculate the Accounting Rate of Return (on average investment) of Machine A (expressed to two decimal places).
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