   Chapter 12, Problem 22BEA ### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

#### Solutions

Chapter
Section ### Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
23 views

# Accounting Rate of ReturnUchdorf Company invested $9,000,000 in a new product line. The life cycle of the product is projected to be 7 years with the following net income stream:$360,000, $360,000,$600,000, $1,080,000,$1,200,000, $2,520,000, and$1,444,000.Required:Calculate the ARR.

To determine

Compute accounting rate of return (ARR).

Explanation

Accounting rate of return:

A method that measures returns from an investment in terms of income instead of cash flow is known as accounting rate of return. It is a non-discounting model of capital investment decision.

Use the following formula to calculate accounting rate of return (ARR):

ARR=AverageincomeInitialinvestment

Substitute $1,080,571 for average income and$9,000,000 for initial investment in the above formula.

ARR=$1,080,571$9,000,000=0.12

Therefore, accounting rate of return is 0.12 or 12%.

Working Note:

1

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