Question

Marine Motors is considering a project that requires an initial investment in fixed assets of $68,000. The project will produce an annual net income of $14,100, $8,500, and $14,300 over the next 3 years, respectively. What is the average accounting return?

Answer 1

Given,

Annual net income of year 1 = $14,100

Annual net income of year 2 = $8,500

Annual net income of year 3 = $14,300

Average net income = Total of annual net income / Number of years

= ($14,100 + $8,500 + $14,300) / 3

= $36,900 / 3

= $12,300

Average investment = (Initial investment in fixed assets + working capital + scrap value) / 2

= $68,000 / 2

= $34,000

Therefore,

Average accounting rate of return = (Average net income / Average investment) X 100

= ($12,300 / $34,000) X 100

= 36.18%

Average accounting rate of return is 36.18%

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