Question

A project has an initial cost of $80,000 and a 3-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,200, $2,300, and $2,800 a year for the next 3 years, respectively. What is the average accounting return? 5.25 percent 5.35 percent 5.45 percent 5.56 percent

Answer 1

5.25%

Step-by-step explanation:

The computation of the average accounting return is shown below:

Average accounting return is

= Average net income ÷ average initial cost

where,

Average net income is

= ($1,200 + $2,300 + $2,800) ÷ 3 years

= $2,100

And, the average initial cost is

= $80,000 ÷ 2

= $40,000

So , the average accounting return is

= $2,100 ÷ $40,000

= 5.25%

Hence, the average accounting return is 5.25%