Jinny's Ice Cream is considering opening a new outlet for a period of three years. The up-front costs are $288,000. The outlet is expected to earn net income of $31,500 a year. What is the expected
Average accounting rate of return on this venture?
A) 14.93%
B) 21.88%
C) 31.25%
D) 38.76%
E) 43.75%

Question

Quizplus · Accepted Answer

The average accounting rate of return (AARR) formula is:

AARR = Average Annual Income / Initial Investment

Average Annual Income = Net Income / Number of Years

So, in this case, we have:

Average Annual Income = $31,500 / 3 years = $10,500

AARR = $10,500 / $288,000 = 0.03645

Convert to a percentage:

AARR = 3.645%

Therefore, the AARR for this venture is 3.645%.

Option B (21.88%) is not the correct answer. The calculations provided for option B are incorrect.

Jinny's Ice Cream Is Considering Opening a New Outlet for a Period