A project has an initial cost of $31,300 and a three-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 $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the average accounting return

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Business

Stella

3 September, 02:41

A project has an initial cost of $31,300 and a three-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 $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the average accounting return

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Answers (1)

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Ingrid Escobar · Answer 1

11.82%

Explanation:

The formula to compute the average accounting rate of return is shown below:

= Annual net income : average investment

where,

Annual net income is

= ($1,750 + $2,100 + $1,700) : 3 years

= $1,850

And, the average investment would be

= (Initial investment) : 2

= ($31,300) : 2

= $15,650

Now placing these values to the above formula

So, the rate would equal to

= $1,850 : $15,650

= 11.82%

We simply applied the above formula