Youre trying to determine whether to expand your business by building a new manu
ID: 2633881 • Letter: Y
Question
Youre trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.1 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,864,300, $1,917,600, $1,886,000, and $1,339,500 over these four years, what is the projects average accounting return (AAR)?
Youre trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.1 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,864,300, $1,917,600, $1,886,000, and $1,339,500 over these four years, what is the projects average accounting return (AAR)?
Explanation / Answer
Average net income = ($1,864,300+ $1,917,600+ $1,886,000+ $1,339,500)/4 = $ 7007400/4 = $1751850
Average book value = ($12.1 +0)/2 = $ 6.05 M
AAR = Average net income / Average book value = 1751850/6050000 = 28.96 %
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