Question

Accounting Rate of Return 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:

Total net income:

= Year 1 + Year 2 + Year 3 + Year 4 + Year 5 + Year 6 + Year 7 + Year 8

= $200,000 + $200,000 + $300,000 + $700,000 + $800,000 + $1,100,000 + $2,000,000 + $1,100,000

= $6,400,000

Average net income = Total net income ÷ no. of years

= $6,400,000 ÷ 8

= $800,000

Amount invested by company in new product line = $8,000,000

Therefore, the Accounting rate of return (ARR) is as follows;

= Average net income ÷ Amount invested by company

= $800,000 ÷ $8,000,000

= 0.1