A project has an initial cost of $27,000 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 $1,600, $2,200, and $1,700 a year for the next three years, respectively. what is the average accounting return? 6.79% 14.69% 10.14% 13.58% 7.35%

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Business

Jaron Brewer

22 April, 22:57

A project has an initial cost of $27,000 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 $1,600, $2,200, and $1,700 a year for the next three years, respectively. what is the average accounting return? 6.79% 14.69% 10.14% 13.58% 7.35%

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Alonso · Answer 1

Average Accounting Return or Accounting Rate of Return

Formula: ARR = Average Profit/Average Investment

Given:

Initial Cost = $27000 (three year life)

Depreciation = 0

Projected Net Income for three years = $1600, $2200 and $1700

Solution:

ARR = [ ($1600+$2200+$1700) / 3]/[ ($27000+0) / 2]

ARR = ($5500/3) / ($27000/2)

ARR = 0.135802 or 13.58%