Colin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. $$\begin{array} { c r r }
\frac { \text { Year } } { 0 } & \frac { \text { Cash Flow } } { } & \text { Net Income } \
1 & - \$ 285,000 & \text { n/a } \
2 & \$ 83,650 & \$ 12,400 \
3 & \$ 92,850 & \$ 21,600 \
4 & \$ 94,350 & \$ 23,100 \
& \$ 93,250 & \$ 22,000
\end{array}$$
A)6.94 percent
B)13.88 percent
C)15.66 percent
D)27.75 percent
E)31.31 percent

Question

Colin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. $$\begin{array} { c r r } 
\frac { \text { Year } } { 0 } & \frac { \text { Cash Flow } } { } & \text { Net Income } \
1 & - \$ 285,000 & \text { n/a } \
2 & \$ 83,650 & \$ 12,400 \
3 & \$ 92,850 & \$ 21,600 \
4 & \$ 94,350 & \$ 23,100 \
& \$ 93,250 & \$ 22,000
\end{array}$$
A)6.94 percent
B)13.88 percent
C)15.66 percent
D)27.75 percent
E)31.31 percent

Quizplus · Accepted Answer

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

The average annual profit can be calculated by taking the sum of the net income over the life of the project and dividing it by the number of years:

Average Annual Profit = (12,400 + 21,600 + 23,100 + 22,000) / 4 = $19,525

To calculate the average investment, we need to find the average of the initial investment and the salvage value:

Average Investment = (285,000 + 0) / 2 = $142,500

Now we can calculate the average accounting rate of return:

Average Accounting Rate of Return = (Average Annual Profit / Average Investment) x 100%
= (19,525 / 142,500) x 100%
= 0.1377 x 100%
= 13.77%

Rounding to two decimal places, we get the closest answer choice of B, which is 13.88 percent.

Colin Is Analyzing a Project and Has Gathered the Following