Martin is analyzing a project and has gathered the following data.Based on this data,what is the average accounting rate of return? The firm depreciates it assets using straight-line depreciation to a zero book value over the life of the asset.
$\begin{array}{|l|l|l|}
\hline \text { Year } & \text { Cash Flow } & \text { Net Income } \
\hline 0 & -£ 642,000 & \mathrm{n} / \text { a } \
\hline 1 & £ 170,000 & £ 9,500 \
\hline 2 & £ 240,000 & £ 79,500 \
\hline 3 & £ 205,000 & £ 44,500 \
\hline 4 & £ 195,000 & £ 34,500 \
\hline
\end{array}$
A)13.08%
B)15.77%
C)21.83%
D)26.17%
E)31.54%

Question

Quizplus · Accepted Answer

The average accounting rate of return is calculated by dividing the average net income by the average investment. The average net income is the sum of the net incomes divided by the number of years, which is (£9,500 + £79,500 + £44,500 + £34,500) / 4 = £42,250. The average investment is the sum of the initial investment and the average depreciation expense, which is (£642,000 + £642,000 / 4) / 2 = £481,000. Therefore, the average accounting rate of return is £42,250 / £481,000 = 13.08%.

Martin Is Analyzing a Project and Has Gathered the Following