You’re trying to determine whether to expand your business by building a new man

Question

You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.5 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,904,300, $1,957,600, $1,926,000, and $1,379,500 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

Average Accounting Return = Average Accounting Profit/ Average Investment Average Profit 1904300 1957600 1926000 1379500 Total 7167400 Average profit = 7167400/4 1791850 Average Accounting Return = 1791850/12500000 0.143348 Average Accounting Return = 14.33%

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