You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.1 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,864,300, $1,917,600, $1,886,000, and $1,339,500 over these four years, what is the project's average accounting return (AAR) ?

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Business

Ella Kim

7 February, 08:37

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.1 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,864,300, $1,917,600, $1,886,000, and $1,339,500 over these four years, what is the project's average accounting return (AAR) ?

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Reuben Dalton · Answer 1

14.48%

Explanation:

The ARR is the quotient between the average income of a project over his investment cost.

The income will consider depreication and taxes.

We are given with the net income so, we should assueme are already included.

Frist step, calculate average net income.

$ 1,864,300,

+ $ 1,917,600

+ $ 1,886,000

+ $ 1,339,500

$ 7,007,400 Total return

Now we divide by 4 because there is a total of 4 years

$ 7,007,400 / 4 = $ 1,751,850 Average income

Now we calculate the ARR

average net income / investment

1,751,850 / 12,100,000 = 0.144780992 = 14.48%