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Youre trying to determine whether or not to expand your business by building a n

ID: 2628600 • Letter: Y

Question

Youre trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $23.4 million, which will be depreciated straight-line to zero over its four-year life.

If the plant has projected net income of $2,055,000, $2,265,000, $2,274,000, and $1,446,000 over these four years, what is the project

Required:

If the plant has projected net income of $2,055,000, $2,265,000, $2,274,000, and $1,446,000 over these four years, what is the project

Explanation / Answer

AAR = Average net income / Average book value

Average net income = ($2,055,000 + $2,265,000 + $2,274,000 + $1,446,000) / 4

Average net income = $2,010,000

Average book value = ($23,400,000 + 0) / 2

Average book value = $11,700,000

AAR = Average net income / Average book value

AAR = $2,010,000 / $11,700,000

AAR = 17.18%