Question

Makeup for Exam 1 Please turn in a Scantron (green, half page) with your answer choice and written solutions showing ALL work to get credit. This makeup is worth up to 15 points (Equivalent to 3 multiple choice questions in Exam 1). 1) Mountain Frost is considering a new project with an initial cost of $270,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The projected net income for each year is $21,300, $22,200, $24,600, and $18,200, respectively. What is the average accounting return? A) 14.65% B) 15.98% C) 7.99% D) 11.99% E) 17.12% 2) A company purchased an asset for $2,850,000 that will be used in a 3-year project. The asset is in the 3-year MACRS class. The depreciation percentage each year is 33. 33 percent, 44.45 percent, and 14.81 percent, respectively. What is the book value of the equipment at the end of the project? A) $211,185 B) $0 C) $633,270 D) $1,900,095 E) $2,638,815

Answer 1

Solution to QUESTION-1

Average Net Operating Income = Total Net Operating Income / Number of years

= [$21,300 + $22,200 + $24,600 + $18,200] / 4 Years

= $86,300 / 4 Years

= $21,575 per year

Average Investment = [Cost of Investment + Residual Value] / 2

= [$270,000 + $0] / 2

= $270,000 / 2

= $135,000

Average Accounting Return (ARR)

Therefore, the Average Accounting Return (ARR) = [Average Net Operating Income / Average Investment] x 100

= [$21,575 / $135,000] x 100

= 15.98%

“Hence, the Average Accounting Return (ARR) will be (B). 15.98%”