You\'re trying to determine whether to expand your business by building a new ma

Question

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,754,300, $1,807,600, $1,776,000, and $1,229,500 over these four years, what is the project's average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Computation of Average accounting raturn

Year PBD Depreciation Profit after depreciation

1 1754300 0 1754300

2 1807600 0 1807600

3 1776000 0 1776000

4 1229500 0 1229500

ARR = Average Income / Average Investment

Average Income = 1754300 + 1807600 + 1776000 + 1229500 / 4

= 1641850

Average investment = original investment / 2

= 11000000 / 2 = 5500000

ARR = 1641850 / 5500000

= 29.85%.

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