You’re trying to determine whether to expand your business by building a new man
ID: 2708945 • Letter: Y
Question
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.2 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,774,300, $1,827,600, $1,796,000, and $1,249,500 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.)
You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.2 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,774,300, $1,827,600, $1,796,000, and $1,249,500 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
Annual Depreciation = (Initial Investment Scrap Value) ÷ Useful Life in Years
= 11200000/4 = 2800000
It is assumed that net income given in question is after depreciation
AVERAGE NET INCOME = (1774300+1827600+1796000+1249500)/4 = $1661850
AAR = Average net income/Initial investment
=1661850/11200000 = 14.8379%
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