Question

Cannon Company invested $8,000,000 in a new product line. The life cycle of the product is projected to be 8 years with the following net income stream: $400,000, $300,000, $700,000, $800,000, $1,100,000, $2,000,000, and $1,100,000.

Required:

Calculate the ARR. Enter your answer as a decimal, do not convert to a percent.

Answer 1

Accounting rate of return = Average accounting profit / Initial investment

Average accounting profit = 400000+300000+700000+800000+1100000+2000000+1100000 / 8 = 800,000

Initial investment =8,000,000

Accounting rate of return = 800,000/8,000,000 = 0.10

[Alternatively: Accounting rate of return = Average accounting profit / Average Investment

Average investment = [Book value at beginning + book value at end] / 2

Since only initial investment given, we can take average investment as initial investment/2 = 8000000/2 = 4000000

Then Accounting rate of return = 800,000/4,000,000 = 0.20]