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A new project has an initial cost of $170,000. The equipment will be depreciated on a...

A new project has an initial cost of $170,000. The equipment will be depreciated on a straight-line basis to a zero book value over the five-year life of the project. The projected net income each year is $12,450, $16,400, $18,320, $14,350, and $10,300, respectively. What is the average accounting return?

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Answer #1

Initial Cost = $170,000
Residual Value = $0
Useful Life = 5 years

Average Investment = (Initial Cost + Residual Value) / 2
Average Investment = ($170,000 + $0) / 2
Average Investment = $85,000

Average Annual Net Income = ($12,450 + $16,400 + $18,320 + $14,350 + $10,300) / 5
Average Annual Net Income = $71,820 / 5
Average Annual Net Income = $14,364

Accounting Rate of Return = Average Annual Net Income / Average Investment
Accounting Rate of Return = $14,364 / $85,000
Accounting Rate of Return = 16.90%

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