Homework SourseA project has an initial cost of 48000 and a fouryear life T
A project has an initial cost of $48,000 and a four-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 $1,700, $1,700, $2,100, and $4,500 a year for the next four years, respectively. What is the average accounting return?
9.60 percent
5.21 percent
20.83 percent
48.96 percent
10.42 percent
| A project has an initial cost of $48,000 and a four-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 $1,700, $1,700, $2,100, and $4,500 a year for the next four years, respectively. What is the average accounting return? |
Solution
Average Accounting return = (Average Net Income / Average Investment)*100
So we have to calculate the Average Net Income
Average Net Income = Net Income from the Project life / Life of project
= ($1700 + $1700 + $2100 + $4500)/4
= $2,500
Average Investment = (Opening Investment - Closing Investment)/2
= ($48,000 - 0)/2
= $24,000
Hence Average Accounting Rate of return = ($2,500 / $24,000)*100
= 10.42%
Hence the answer will be Opion E) 10.42 Percent.
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