JT Engineering is deciding between two machines. Machine A costs $352,000, with inflows of $209,000 and outflows of $154,000. Machine B costs $380,000, with inflows of $231,000 and outflows of $166,000. Both have a 10-year life and no salvage value. JT uses the straight-line method for depreciation and requires a return of 12%. How desirable are the machines? Use annual rate of return to determine the answer.

Annual rate of return of both machine needs to ascertained ,then compared with the required annual rate of rate of 12% in order to determine which machine gives at least 12% annual rate of return and worth investing in.

Annual rate of return=net income/average investment

net income=inflows-outflows-depreciation

Machine A average investment=$352,000/2=$176,000

Machine B average investment=$380,000/2=$190,000

Machine A net income=$209,000-$154,000-($355,000/10)

=$209,000-$154,000-$35,500

=$19,500

Machine B net income=$231,000-$166,000-($380,000/10)

=$231,000-$166,000-$38,000

=$27,000

Machine A annual rate of return=$19,500/$176,000

=11.08%

Machine B annual rate of return=$27,000/$190,000

=14.21%

Tundexi Tundexi · Answer 2 · 2021-12-09T16:23:05+01:00

The Machine B is more preferable because its annual rate of return (14.21%) is higher than the required annual rate of return (12%).

The Annual rate of return of both machine needs to known to encourage comparison with the required annual rate of return

Given Information

The required annual rate of rate = 12%

Machine A average investment = $352,000/2

Machine A average investment = $176,000

Machine B average investment = $380,000/2

Machine B average investment = $190,000

Net income = Inflows - Outflows - Depreciation

Machine A Net income = $209,000 - $154,000 - ($355,000/10)

Machine A Net income = $209,000 - $154,000 - $35,500

Machine A Net income =$19,500

Machine B Net income = $231,000 - $166,000 - ($380,000/10)

Machine B Net income = $231,000 - $166,000 - $38,000

Machine B Net income = $27,000

Annual rate of return = Net income/Average investment

Machine A Annual rate of return = $19,500/$176,000

Machine A Annual rate of return = 11.08%

Machine B Annual rate of return =$27,000/$190,000

Machine A Annual rate of return = 14.21%

Therefore, the Machine B is more preferable because its annual rate of return (14.21%) is higher than the required annual rate of return (12%).

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