## 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%