Youre trying to determine whether or not to expand your busi

You\'re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $26 million, which will be depreciated straight-line to zero over its three-year life. If the plant has projected net income of $2,348,000, $2,680,000, and $1,920,000 over these three years, what is the project\'s average accounting return (AAR)?

Solution

Hi,

Please find the detailed answer as follows:

Average Income = (2348000 + 2680000 + 1920000)/3 = 2316000

Average Investment = 26000000/2 = 13000000

AAR = Average Income/Average Investment = 2316000/13000000*100 = 17.82%

Answer is 17.82%

Thanks.