Question

mountain frost is considering a new project with an initial cost of $210,000. the equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. the projected net income for each year is $20,100, $21,000, $24,600, and $17,000, respectively. what is the average accounting return? multiple choice 21.10% 9.85% 14.77% 19.69% 18.05%

Answer 1

The average accounting return is 19.69%

A project's average annual return is determined by dividing its average lifetime revenues by the average book value of the investment.

Calculating the total value in four years -

Projected net income for every year/ Time

= 20,100 + 21,300 + 24,600 + 17000/4

= 83000/4

= 20,750

Calculating average accounting return -

= Initial Cost/2

= 2,10,000/2

= 1,05,000

Calculating the rate -

= Total value/ Average accounting return

20,750/1,05,000

= .1969 or

= 19.69%

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