Question 5

The Fine Clothing Factory wants to replace an old machine with a new one. The old machine can be sold to a small factory for N$10,000. The new machine would increase annual revenue by N$150,000 and annual operating expenses by N$60,000. The new machine would cost N$360,000. The estimated useful life of the machine is 12 with zero salvage value.

Required:

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

2. Should Fine Clothing Factory purchase the machine if management wants an accounting rate of return of 15% on all capital investments? (5)