A project produces annual net income amounts of $8,200, $17,800, and $20,900 over its 3-year life. The initial cost is $198,900, which 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 14.5 percent?
A) 15.72 percent
B) 16.67 percent
C) 18.98 percent
D) 17.25 percent
E) 16.84 percent

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 amounts over the life of the project divided by the number of years in the project. The initial cost of the project is the amount of money invested in the project at the beginning. In this case, the average annual net income is ($8,200 + $17,800 + $20,900) / 3 = $15,633.33. The initial cost of the project is $198,900. Therefore, the average accounting rate of return is $15,633.33 / $198,900 = 0.0786, or 7.86%.

A Project Produces Annual Net Income Amounts of $8,200, $17,800