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you're trying to determine whether or not to expand your business by building a new manufacturing plant. the plant has an installation cost of $29 million, which will be depreciated straight-line to zero over its three-year life. if the plant has projected net income of $1,848,000, $2,080,000, and $2,720,000 over these three years, what is the project's average accounting return (aar)?

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Tundexi

The project's average accounting return equals to an amount of 15.28%.

What is an average accounting return?

Here, we will definite ab average accounting return as the average net income divided by the average book value.

The average net income for this project is:

= ($1,848,000 + $2,080,000 + $2,720,000) / 3

= $6,648,000 / 3

= $2,216,000

The average book value for this project is:

Average book value = ($29,000,000 + 0) / 2

Average book value = $14,500,000

The average accounting return for the project is

= Average net income / Average book value

= $2,216,000  / $14,500,000

= 0.152827586

= 15.28%

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