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24 October, 21:16

Longordia Foods is expecting to generate after-tax income of $1,558,888, $2,933,312, and $3,261,712 for each of the next three years. The equipment used will have an average book value of $8,375,000 over that period. What is the accounting rate of return (ARR) ?

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  1. 25 October, 01:15
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    30.86%

    Explanation:

    It is a financial ratio used for the capital budgeting. It is the ratio of the average return generated by the capital asset and the its average book value in the given period.

    Formula for ARR is as follow

    ARR = Average Net Income / Average Investment

    Average Net Income = ($1,558,888 + $2,933,312 + $3,261,712) / 3

    Average Net Income = $2,584,637

    Average Investment = $8,375,000

    Placing values in the formula

    ARR = $2,584,637 / $8,375,000

    ARR = 0.3086 = 30.86%
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