Colin's Haberdashery Products is considering a project that would have an initial cost of...
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Colin's Haberdashery Products is considering a project that would have an initial cost of $285,000 and a 4-year life. The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project. Projected cash flow from the project is forecast at $83,650, $92,850, $94,350 and $93,250 respectively for the next 4 years. Projected annual net income from the project is forecast at $12,400, $21,600, $23,100 and $22,000 for the next 4 years, respectively. What is the average accounting return?
a. 6.94 percent
b. 13.88 percent
c. 15.66 percent
d. 27.75 percent
e. 31.31 percent
Accounting Rate of Return:
Accounting rate of return is a capital budgeting technique that helps to determine the profitability of an investment based on the annual net income. The method does not use the time value of money in its computation.
Answer and Explanation: 1
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Correct Answer: Option b) 13.88 percent.
Explanation:
Step 1:
- Average annual net income = Sum of the net profits of 4 years / 4
- Average annual net...
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Using the Accounting Rate of Return Method to Evaluate a Budget
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Chapter 14 / Lesson 8
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Capital budgets are used for large projects completed over long timelines and can be evaluated using the accounting rate of return (ARR) comparing the average rate of return to investments. Learn how the desired and actual ARR are calculated and guide future budget decisions.
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