You’re trying to determine whether to expand your business by building a new manufacturing plant. The...

You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12.6 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,914,300, $1,967,600, $1,936,000, and $1,389,500 over these four years, respectively, what is the project’s average accounting return (AAR)?

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Expert Solution

Average net income=Total net income/Total time period

=(1,914,300+1,967,600+1,936,000+1,389,500)/4

=$1801850

Average investment=(12,600,000/2)=$6,300,000

AAR=Average net income/Average investment

=1801850/6,300,000

=28.6%(Approx)

jeff jeffy answered 1 year ago

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