A project produces annual net income of $14,600, $18,700, and $23,500 over three years, respectively. The initial cost of the project is $310,800. This cost 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 9 %?
A) 12.18 %
B) 14.29 %
C) 15.63 %
D) 17.67 %
E) 18.28 %

Question

Quizplus · Accepted Answer

The average accounting rate of return is calculated by dividing the average annual net income by the initial cost of the project. The average annual net income is the sum of the net income over the three years divided by three, which is (14,600 + 18,700 + 23,500) / 3 = 18,933.33. The initial cost of the project is $310,800. Therefore, the average accounting rate of return is 18,933.33 / 310,800 = 0.0612, or 6.12%.

A Project Produces Annual Net Income of $14,600, $18,700, and $23,500