Additional Information:
Net Operating Income before investment $1,710,000
Net Operating Income After investment $2,690,000
Answer:
12.65%
Explanation:
Now the project's accounting rate of return can be calculated using the following formula:
Accounting rate of return = Average Project Net Income / Avg. Investment
Here
Average Project Net Income is $980,000 per year (Step1)
and
Average investment is $7,750,000 (Step2)
By putting values, we have:
Accounting rate of return = $980,000 / $7,750,000 = 12.65%
Step1: Average Project Net Income
The relevant cash generated due to additional sales is the difference of the net operating income before investment and after investment, which is:
Investment Profit per year = $2,690,000 - $1,710,000 = $980,000 per year
<u>Step2: Average Investment</u>
Average Investment = (Initial Investment + Residual Value) / 2
Here
Initial Investment is $15 million
and
Residual Value is $0.5 million
So by putting values, we have:
Average Investment = ($15 million + $0.5 Million) / 2 = $7.75 million
