Question

A project has an initial cost of $48,000 and a four-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 $1,700, $1,700, $2,100, and $4,500 a year for the next four years, respectively. What is the average accounting return?

9.60 percent

5.21 percent

20.83 percent

48.96 percent

10.42 percent

Answer 1

Average Accounting return = (Average Net Income / Average Investment)*100

So we have to calculate the Average Net Income

Average Net Income = Net Income from the Project life / Life of project

= ($1700 + $1700 + $2100 + $4500)/4

= $2,500

Average Investment = (Opening Investment - Closing Investment)/2

= ($48,000 - 0)/2

= $24,000

Hence Average Accounting Rate of return = ($2,500 / $24,000)*100

= 10.42%

Hence the answer will be Opion E) 10.42 Percent.  

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