A project has an initial cost of $38,000 and a four-year life. The company uses

Question

A project has an initial cost of $38,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,200, $3,500, $3,800, and $4,500 a year for the next four years, respectively. What is the average accounting return?

8.55 percent

17.11 percent

69.74 percent

5.85 percent

34.21 percent

A project has an initial cost of $38,000 and a four-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,200, $3,500, $3,800, and $4,500 a year for the next four years, respectively. What is the average accounting return?

Explanation / Answer

Projects Average Investment = (28500 + 19000 + 9500+ 0 )/4 = 19000

As yearly depreciation = 38000/4 = 9500; every year book value is reduced by 9500

Net Income = 1200 + 3500 + 3800 + 4500 = 13000

Average Return = 13000 /4 = 3250

Average Accounting return = 3250 / 19000 = 17.11%

Net income is calculated after considering depreciation expense and hence no adjustment for depreciation is reuired to be made

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