Question

A project produces annual net income of $18,200, $21,800, and $22,900 over its three-year life, respectively. the initial cost is $197,000, which is depreciated straight-line to a zero book value over three years. what is the average accounting rate of return if the required discount rate is 14.5 percent?

Answer 1

Initial cost = $197,000
Total net accounting income over three years = $18,200+$21,800+$22,900 = $62,900

Average annual accounting net income = $62,900/3 = $20,966.67

Accounting rate of return = Average net annual income / Initial cost = 20,966.67/197,000 = 0.106 = 10.6%

Since Accounting net income is lower than the required discount rate, the project is not viable.