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A project has an initial cost of $27,000 and a three-year life. the company uses straight-line depreciation to a book value of zero over the life of the project. the projected net income from the project is $1,600, $2,200, and $1,700 a year for the next three years, respectively. what is the average accounting return? 6.79% 14.69% 10.14% 13.58% 7.35%

Respuesta :

Average Accounting Return or Accounting Rate of Return

Formula: ARR = Average Profit/Average Investment

Given:

Initial Cost = $27000 (three year life)

Depreciation = 0

Projected Net Income for three years = $1600, $2200 and $1700

Solution:

ARR = [($1600+$2200+$1700)/3]/[($27000+0)/2]

ARR = ($5500/3)/($27000/2)

ARR = 0.135802 or 13.58%

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Average Accounting Return or Accounting Rate of Return

Formula: ARR = Average Profit / Average Investment

Solution:

ARR = [($ 1600 + $ 2200 + $ 1700) / 3] / [($ 27000 + 0) / 2]

ARR = ($ 5500/3) / ($ 27000/2)

ARR = 0.135802 or 13.58%

Further Explanation

Accounting Return Rate is basically measuring the expected annual income or profit from an investment. In other words, this ARR calculates how much money will be returned to investors from an investment.

The accounting rate of return or the rate of accounting return is a measure of return on investment calculated by dividing net income by the average investment. This method is used to evaluate a capital investment, for example, the construction of new projects.

To calculate it, we reduce investment inflows with investment costs to obtain a return on value. Profits, then, are divided by investment costs to estimate the annual rate of return.

There are three advantages possessed by ARR. First, ARR calculation is very simple and easy to understand. Second, ARR can be used to measure the profitability of all investment projects because it considers cash flow throughout the life of the project. Third, ARR calculations are based on accounting information that is available and easily understood by employers.

Learn More

Accounting Return Rate  https://brainly.com/question/10086721

The Profitability  https://brainly.com/question/10086721

Details

Grade: College

Subject: Business

Keyword: ARR, profitable, accounting

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