You’re trying to determine whether or not to expand your business by building a

Question

You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $24.2 million, which will be depreciated straight-line to zero over its four-year life.
  
If the plant has projected net income of $2,095,000, $2,285,000, $2,314,000, and $1,466,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
  
Average accounting return             %

Explanation / Answer

1.Calculation of Project's Average Accounting Return :

   Since it was given net income which indirectly becomes profit after deprecitaion(or we can assume it is after depreciation).If we assume net income before taxation then net cash flows would be gone negative,so we are assuming net income as operating profit before interest and taxed but after depreciation.

Average profit = ($2095000+$2285000+$2314000+$1466000)/4

= $2040000

Average Investment = $24200000

Project's Average Accounting Return = $2040000/$24200000*100

= 8.43%

If we ignore the word then Return = $ 8160000/$24200000

= $ 33.72%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.