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. 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

Average accounting return = Average net income/Average investment

= [($2,115,000+$2,295,000+$2,334,000+$1,476,000)÷4]÷($24,600,000÷2)

= 16.71%

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