Average Accounting Return You are looking at a three-year project with a projected net income of $2,000 in Year 1, $4,000 in Year 2, and $6,000 in Year 3.

Question

Average Accounting Return You are looking at a three-year project with a projected net income of $2,000 in Year 1, $4,000 in Year 2, and $6,000 in Year 3. The cost is $12,000, which will be depreciated straight-line to zero over the three-year life of the project. What is the average accounting return (AAR)?

Accepted Answer

Here we need to calculate the ratio of average net income to average book value to get the AAR. Average net income is:

Average net income=($2,000+4,000+6,000)/3=$4,000

Average book value is:

Average book value=$12,000/2=$6,000

So the average accounting return is:

AAR=$4,000/6,000=66.67%

This is an impressive return. Remember, however, that it isn’t really a rate of return like an interest rate or an IRR, so the size doesn’t tell us a lot. In particular, our money is probably not going to grow at a rate of 66.67 percent per year, sorry to say.

Question 9.S-T.3: Average Accounting Return You are looking at a three-year pr...

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