Mountain Frost is considering a new project with an initial cost of $275,000

Finance Aug 06, 2020

Mountain Frost is considering a new project with an initial cost of $275,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $21,400, $22,300, $24,600, and $18,300, respectively. What is the average accounting return?

Expert Solution

Initial investment= $275000

Average net income= ($21,400+ $22,300+ $24,600+ $18,300)/ 4

= $21650

Average investment= (Initial investment+ Book value at the end)/ 2

= (275000+ 0)/ 2

= $137500

Average accounting rate of return= (Average net income/ Average investment)* 100

= (21650/ 137500)* 100

= 15.75%

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