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 $24.2 million, which will be depreciated straight-line to zero over its four-year life.
  
If the plant has projected net income of $2,095,000, $2,285,000, $2,314,000, and $1,466,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Average accounting return             %

Explanation / Answer

Particulars Amount Initial Installation Cost (A) A $242,00,000 Projected Income Year 1 $20,95,000 Year 2 $22,85,000 Year 3 $23,14,000 Year 4 $14,66,000 Total Projected Income over 4 years B $81,60,000 Average Projected Income over 4 years C =B/4 $20,40,000 Average rate of return D = C/A% 8.43%

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