Managerial Accounting

John has invested in a machine that cost $70,000, that has a useful life of seven years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of four years. Given these data, the simple rate of return on the machine is closest to:
A)7.1%.
B)8.2%.
C)10.7%.
D)39.3%

As this is your third post at least, let me try help guide your thinking. BTW, accounting is not my area of expertise.
My short answer is: none of the above. Check to make sure you have given all of the information. If I have to pick one, I would go with D, 39.3%

What you have is a case where a $70,000 investment pays for itself in 4 years -- correct? So, the simple (non-compounding) rate of return should be 25%

However, your question adds a depreciation wrinkle. With SL depreciation the firm will deduct 4/7 of the 70,000 over 4 years. At a hefty 35% marginal tax rate, the value of the deduction is 70000*(4/7)*.35=14000, or $3500 per year, or 5% per year. So, assuming the return from the machine is magically untaxed, and the return is $70000 over 4 years, and the firm gets the 3500 (5%) depreciation, the rate of return becomes 30%. This is the best rate of return I can come up with, and it requires heroic assumptions.

I have tried, none of the answers seems to fit. But again, this is not my area.


Thanks for trying, at least now I have a better idea how to tackle it. Thanks.

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