A project has an initial cost of $31,300 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the average accounting return

The average rate of return is the proportion rate used in budgeting finances and is called the accounting rate of return (ARR).

The accounting rate of return can be calculated by the formula:

The average accounting return is 11.82%.

The accounting return can be estimated as:

Computation of average accounting return can be done by:

Where,

And,

Replacing values in formula:

Therefore, 11.82% is the ARR.

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11.82%

Explanation:

The formula to compute the average accounting rate of return is shown below:

= Annual net income ÷ average investment

where,  

Annual net income is

= ($1,750 + $2,100 + $1,700) ÷ 3 years

= $1,850

And, the average investment would be

= (Initial investment) ÷ 2

= ($31,300) ÷ 2

= $15,650

Now placing these values to the above formula  

So, the rate would equal to

= $1,850 ÷ $15,650

= 11.82%

We simply applied the above formula

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