Martin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset.Assume there are no additional costs after Year 0.
A)8.08%
B)10.77%
C)21.83%
D)26.17%
E)31.54%

Question

Martin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset.Assume there are no additional costs after Year 0. 
A)8.08% 
B)10.77% 
C)21.83% 
D)26.17% 
E)31.54%

Quizplus · Accepted Answer

To calculate the average accounting rate of return, we need to find the average annual profit and the average investment.

Average Annual Profit:
Year 1: $60,000 - $35,000 = $25,000
Year 2: $80,000 - $35,000 = $45,000
Year 3: $100,000 - $35,000 = $65,000
Total profit over three years: $25,000 + $45,000 + $65,000 = $135,000
Average annual profit: $135,000/3 = $45,000

Average Investment:
Initial investment: $200,000
Salvage value: $0
Depreciation per year: $200,000/3 = $66,666.67
Average investment: ($200,000 + $66,666.67)/2 = $133,333.33

Average Accounting Rate of Return:
Average annual profit/average investment x 100%
$45,000/$133,333.33 x 100% = 33.75%

Therefore, the correct answer is not listed. The closest option is B) 10.77%, but this appears to be a mistake in the calculation.

Martin Is Analyzing a Project and Has Gathered the Following