Question

You’re trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of 11.8 million, which will be depreciated straight-line to zero over its four year life. If the plant has projected net income of $1,834,300, $1,887,600,$1,856,000, and $1,309,500 over these four years, what is the projects average accounting return?

Answer 1

The plant has an installation cost of 11.8 million, which will be depreciated straight-line to zero over its four year life.

Average value of fixed assets = ($11,800,000 + $0) / 2

= $5,900,000

Average value of fixed assets is $5,900,000.

Average value of net Income in 4 year = ($1,834,300 + $1,887,600 + $1,856,000 + $1,309,500) / 4

= $6,887,400 / 4

= $1,721,850

Average value of net Income in 4 year is $1,721,850.

Average accounting return = Average Net Income / Average value of assets

= $1,721,850 / $5,900,000

= 29.18%

Average accounting return is 29.18%.