Question - Average Accounting Returns
Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts.
|
|
PURCHASE DATE
|
YEAR 1
|
YEAR 2
|
YEAR 3
|
YEAR 4
|
|
Gross Investment
|
$28,000
|
$28,000
|
$28,000
|
$28,000
|
$28,000
|
|
Less: Accumulated depreciation
|
0
|
7,000
|
14,000
|
21,000
|
28,000
|
|
Net Investment
|
$28,000
|
$21,000
|
$14,000
|
$7,000
|
$0
|
The machine generates, on average, $4,300 per year in additional net income.
Required -
a. What is the average accounting return for this machine?
b. What three flaws are inherent in this decision rule?