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 $19.4 million, which will be depreciated straight-line to zero over its four-year life.

Required: If the plant has projected net income of $1,855,000, $2,098,325, $2,074,000, and $1,346,000 over these four years, what is the project’s average accounting return (AAR)? (Do not include the percent sign (%).Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Average net income = (1,855,000 + 2,098,325 + 2,074,000 + 1,346,000) / 4

Average net income = $1,843,331.25

And the average book value is:

Average book value = ($19,400,000 + 0) / 2

Average book value = $9,700,000

So, the AAR for this project is:

AAR = Average net income / Average book value AAR = $1,843,331.25 / $9,700,000

AAR =19%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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