Problem 7-5 Average Accounting Return Your firm is considering purchasing a mach

Question

Problem 7-5 Average Accounting Return

Your firm is considering purchasing a machine with the following annual, end-of-year, book investment accounts.

The machine generates, on average, $8,300 per year in additional net income.

What is the average accounting return for this machine? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

AAR            %

Purchase Date Year 1 Year 2 Year 3 Year 4 Gross investment $ 74,000 $ 74,000 $ 74,000 $ 74,000 $ 74,000 Less: Accumulated depreciation 0 18,500 37,000 55,500 74,000 Net investment $ 74,000 $ 55,500 $ 37,000 $ 18,500 $ 0

Explanation / Answer

Average Investment = (Initial Investment + Salvage Value) / 2
Average Investment = ($74,000 + $0) / 2
Average Investment = $37,000

Average Accounting Return = Average Net Income / Average Investment
Average Accounting Return = $8,300 / $37,000
Average Accounting Return = 22.43%

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