23. A project produces annual net income of $46,200, $51,800, and $62,900 over i

Question

23. A project produces annual net income of $46,200, $51,800, and $62,900 over its 3-year life, respectively. The initial cost of the project is $675,000. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5%? You are analyzing a project and have gathered the following data: Year Cash Flow 0 - 175,000 1 56,400 2 61,800 3 72,000 4 75,000 Required payback period 2.5 years Required AAR 11.5% Required return 14.5%

Explanation / Answer

average accounting rate of return = Average profit/Average investment Average Investment = (675000+0)/2 = 337500 Average profit = (46200+51800+62900)/3 = 53633.33333 =>average accounting rate of return = 53633.33333/337500 = 0.1589 = 15.89%

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