You’re trying to determine whether to expand your business by building a new man
ID: 2710514 • 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 $11.8 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,834,300, $1,887,600, $1,856,000, and $1,309,500 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.)
Average accounting return %
Explanation / Answer
Cost of Machine 11,800,000.00 Salvage Value - Life in years 4.00 Particulars 1 2 3.00 4.00 Opening Balance 11,800,000.00 8,850,000.00 5,900,000.00 2,950,000.00 Depreciation(11,800,000/4) 2,950,000.00 2,950,000.00 2,950,000.00 2,950,000.00 Closing balance 8,850,000.00 5,900,000.00 2,950,000.00 - Average Balance = Op+Cl/2 10,325,000.00 7,375,000.00 4,425,000.00 1,475,000.00 23,600,000.00 Average int over Life 5,900,000.00 Year Net Income 1.00 1,834,300.00 2.00 1,887,600.00 3.00 1,856,000.00 4.00 1,309,500.00 Total Income in 4 Years 6,887,400.00 Average income = Total Inc/No of years 1,721,850.00 Average Investment 5,900,000.00 Average Accounting return = Average Profit/Avg Investment 29.18%
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