You’re trying to determine whether or not to expand your business by building a new plant. The plant would cost $14m and be depreciated straight line to zero over four years.
You’re trying to determine whether or not to expand your business by building a new plant. The plant would cost $14m and be depreciated straight line to zero over four years.
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 3P
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You’re trying to determine whether or not to expand your business by building a new plant. The plant would cost $14m and be depreciated straight line to zero over four years. The net income is estimated as $1.741m, $1.628m, $1.301m and $1m. What is the project’s average accounting return (AAR)? You decide to implement new rules on depreciation. You recognise that the building housing the plant is increasing in value so that depreciation of $1m per year is appropriate. Does the AAR change? If you require a 20% AAR how is the project affected?
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