Question

Cannon Company invested $8,000,000 in a new product line. The life cycle of the product is projected to be 8 years with the following net income stream: $200,000, $200,000, $300,000, $700,000, $800,000, $1,100,000, $2,000,000, and $1,100,000. Required:Calculate the ARR. Enter your answer as a decimal, do not convert to a percent.

Answer 1

0.1

Step-by-step explanation:

The Average Rate of Return (ARR) is the average net income an asset/investment is expected to generate over the course of its lifetime.

The Formula for ARR is Average Annual Net Income ÷ Initial Investment. If the question says to convert to percentage then the computed figure is multiplied by 100.

Step 1: Compute Average Annual Net Income

Add the streams from the 1st to the 8th year and divide by 8

$200000+$200000+$300000+$700000+$800000+$1100000+$2000000+$1100000=$6,400,000

$6,400,000÷8=$800,000

Step 2: Compute the ARR

Average Annual Net Income÷ Initial Investment

$800,000÷$8,000,000= 0.1

Note: The Figure should be multiplied by 100 to get the percentage figure if requested.