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22 June, 13:10

Accounting Rate of Return Cannon Company invested $8,000,000 in a new product line.

The life cycle of the product is projected to be 8 years with the following net income stream: $200,000, $200,000, $300,000, $700,000, $800,000, $1,100,000, $2,000,000, and $1,100,000.

Required: Calculate the ARR. Enter your answer as a decimal, do not convert to a percent.

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  1. 22 June, 14:47
    0
    0.1

    Explanation:

    Total net income:

    = Year 1 + Year 2 + Year 3 + Year 4 + Year 5 + Year 6 + Year 7 + Year 8

    = $200,000 + $200,000 + $300,000 + $700,000 + $800,000 + $1,100,000 + $2,000,000 + $1,100,000

    = $6,400,000

    Average net income = Total net income : no. of years

    = $6,400,000 : 8

    = $800,000

    Amount invested by company in new product line = $8,000,000

    Therefore, the Accounting rate of return (ARR) is as follows;

    = Average net income : Amount invested by company

    = $800,000 : $8,000,000

    = 0.1
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