Homework SourseProblem 75 Average Accounting Return Your firm is considerin
Problem 7-5 Average Accounting Return
Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts.
The machine generates, on average, $8,300 per year in additional net income.
What is the average accounting return for this machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
AAR %
| Purchase Date | Year 1 | Year 2 | Year 3 | Year 4 | |||||||||||||||
| Gross investment | $ | 74,000 | $ | 74,000 | $ | 74,000 | $ | 74,000 | $ | 74,000 | |||||||||
| Less: Accumulated depreciation | 0 | 18,500 | 37,000 | 55,500 | 74,000 | ||||||||||||||
| Net investment | $ | 74,000 | $ | 55,500 | $ | 37,000 | $ | 18,500 | $ | 0 | |||||||||
Solution
Average Investment = (Initial Investment + Salvage Value) / 2
Average Investment = ($74,000 + $0) / 2
Average Investment = $37,000
Average Accounting Return = Average Net Income / Average Investment
Average Accounting Return = $8,300 / $37,000
Average Accounting Return = 22.43%
