Question

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

	Purchase Date				Year 1				Year 2				Year 3				Year 4
Gross investment	$	71,000			$	71,000			$	71,000			$	71,000			$	71,000
Less: Accumulated depreciation		0				17,750				35,500				53,250				71,000
Net investment	$	71,000			$	53,250			$	35,500			$	17,750			$	0

The machine generates, on average, $7,300 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             %

Answer 1

If average net investment is used
Average accounting rate of return	average net income/average investment	20.56%
average net income		7300
average net investment	(71000+53250+35500+17750+0)/5	35500
If gross investment is used as initial investment
Average accounting rate of return	average net income/average investment	10.28%
average net income		7300
average net investment		71000