Wednesday, 9 July 2014

You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.3 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,784,300, $1,837,600, $1,806,000, and $1,259,500 over these four years, what is the project’s average accounting return (AAR)?

You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.3 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,784,300, $1,837,600, $1,806,000, and $1,259,500 over these four years, what is the project’s average accounting return (AAR)? (Round your answer to 2 decimal places. (e.g., 32.16))

  Average accounting return %  


Explanation:
Our definition of AAR is the average net income divided by the average book value. The average net income for this project is:
Average net income = ($1,784,300 + 1,837,600 + 1,806,000 + 1,259,500) / 4 = $1,671,850
And the average book value is:
Average book value = ($11,300,000 + 0) / 2 = $5,650,000
So, the AAR for this project is:
AAR = Average net income / Average book value = $1,671,850 / $5,650,000 = 0.2959, or 29.59%