Desiree, Inc. is considering adding a new product with a start-up cost of $540,000. This cost will be depreciated over 3 years, which is the estimated life of the product. Desiree has a 34% marginal tax
Rate. The net income for each of the three years is estimated at $15,000, $45,000, and $80,000.
What is the average accounting return for the new product?
A) 8.64%
B) 11.30%
C) 17.28%
D) 21.00%
E) 25.93%

Question

Quizplus · Accepted Answer

The average accounting return (AAR) is calculated as the average net income divided by the initial investment. The average net income is ($15,000 + $45,000 + $80,000) / 3 = $46,666.67. The initial investment is $540,000. AAR = $46,666.67 / $540,000 = 0.0864 or 8.64%.