You\'re trying to determine whether or not to expand your business by building a

Question

You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $21.8 million, which will be depreciated straight-line to zero over its four-year life. Required: If the plant has projected net income of $1,975,000, $2,225,000, $2,194,000, and $1,406,000 over these four years, what is the project's average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) Average accounting return

Explanation / Answer

Average net income:

= (Sum of net incomes/Life of the Project

=($1,975,000+$2,225,000+$2,194,000+$1,406,000/4)

=$7,800,000 /4

= $1,950,000

Average book value

= Beginning book value + Ending book value/2

= $21,800,000 +0 /2

=$10,900,000

Average Accounting Return= Average net income/ Average book value

                                                       =$1,950,000/$10,900,000

                                                       = 17.89%

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