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 $24.6 million, which will be depreciated straight-line to zero over its four-year life. Required: If the plant has projected net income of $2,115,000, $2,295,000, $2,334,000, and $1,476,000 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).)

Explanation / Answer

Initial Investment = $24,600,000

Annual Depreciation = 24600000/4=6150000

Net Income =

        Year 1: $2,115,000

        Year 2: $2,295,000

        Year 3: $2,334,000

        Year 4: $1,476,000

Average accounting Income = (2115000+2295000+2334000+1476000) / 4 = 2055000

The formula for Average accounting rate of return (AAR) = (Average Profit / Average Investment) x 100

Average Accounting return = (2055000 / 24,600,000) x 100 = 8.3536585 %

So rounding the answer Average Accounting return = 8.35%

(Note: - In the Average accounting return calculation, the Average profit will be net profit – Depreciation. Here I have assumed the net income in the question is the net profit – Depreciation, so I have not deducted the depreciation again from Net income)

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.