You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.3 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,884,300, $1,937,600, $1,906,000, and $1,359,500 over these four years, what is the project’s average accounting return (AAR)?

You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.3 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,884,300, $1,937,600, $1,906,000, and $1,359,500 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.)

  

Average accounting return

%

 

Explanation:

Our definition of AAR is the average net income divided by the average book value. The average net income for this project is:

Average net income = ($1,884,300 + 1,937,600 + 1,906,000 + 1,359,500) / 4 = $1,771,850

And the average book value is:

Average book value = ($12,300,000 + 0) / 2 = $6,150,000

So, the AAR for this project is:

AAR = Average net income / Average book value

AAR = $1,771,850 / $6,150,000

AAR = .2881, or 28.81%