Question

Uchdorf Company invested $9,620,000 in a new product line. The life cycle of the product is projected to be seven years with the following net income stream: $360,000, $360,000, $600,000, $1,080,000, $1,200,000, $2,520,000, and $1,444,000. Required: Calculate the ARR. Enter your answer as a decimal, do not convert to a percent. Round your answer to two decimal places.

Answer 1

Answer:

ARR is 11.23%

Explanation:

The formula for accounting rate of return(ARR)=Average net income/initial investment

Average net income=net income for relevant relevant years/number of years

net income for relevant years=$360,000+$360,000+$600,000+$1,080,000+$1,200,000+$2,520,000+$1,444,000=$ 7,564,000.00  

number of years is 7

average net income=$ 7,564,000.00/7

                                 =$1,080,571.43  

Initial investment is $9,620,000

ARR=$1,080,571.43/ $9,620,000*100=11.23%

The average rate of return is 11.23%,the return expected on the average annually.