You\'re trying to determine whether to expand your business by building a new ma

Question

You're trying to determine whether to expand your business by building a new manufacturing plant The plant has an installation cost of $12 8 million, which will be depreciated straight line to zero over its four year life If the plant has projected net income of $1,934,300, $1,987,600. $1,956,000. and $1,409,500 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

Average book value of asset = $12,800,000/4 = $3,200,000

Average net income = (1,934,300+1,987,600+195,6000+1,409500)/4 = $1821850

Average accounting return = average net income / average book value of asset
= 1,821,850 / 3,200,000 = 0.5693 = 56.93%

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