Question

Alpha Corp. is considering adding a new product to its lineup and has estimated the following:

Year	Net Income
0	0
1	$1,500
2	$3,800
3	$7,100
4	$3,300

If the average book value is $20,000, what is the average accounting return (AAR) of the project?

Multiple Choice

• 16.50%   

• 7.31%

• 19.63%

• 78.50%

Answer 1

Average Accounting Return is defined as the average Net Income a project is expected to generate divided by its Average Investment, where :
Average Net Income = Total Net Income of all the year/No of years
Average Net Income = ($1,500+$3,800+$7,100+$3,300)/4
            = $15,700/4
            = $3,925

Using the formula,
Average Accounting Return = $3,925/$20,000
            = 19.63%

Option c is correct.