An answer of 38.1% results from the average of the after-tax cash flows divided by the net initial investment. However, the after-tax cash flows are not used in calculating the accounting rate of return.
The accounting rate of return is the average annual after-tax net income attributable to the project divided by the net initial investment. The average of the five annual net income amounts given is $19,000 ([$15,000 + $17,000 + $19,000 + $21,000 + $23,000] / 5 = $19,000.) $19,000 / $105,000 = .18095 or 18.1%. (Note: sometimes the average of the initial investment over the life of the project is used, calculated as the initial investment divided by 2. However, this question specifies to use the initial value of the investment, not the average investment.)
An answer of 28.1% results from averaging the annual after-tax cash flows and then averaging the annual net incomes, then taking the average of the two averages and dividing it by the net initial investment. However, the after-tax cash flows and annual net incomes should not be averaged together.
An answer of 36.2% results from using the average amount of the investment over the life of the project (the net initial investment divided by 2). Sometimes, the accounting rate of return is calculated using the average amount of the investment over the life of the project. However, this question specifies to use the initial value of the investment, not the average investment.
|
Yipann uses a 24% after-tax target rate of return for new investment proposals. The discount figures for a 24% rate of return are given.
The accounting rate of return for the investment proposal over its life using the initial value of the investment iss