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Managerial Accounting: The Corners...

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

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Accounting Rate of Return

Cannon 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 $800,000 for average income and $8,000,000 for initial investment in the above formula.

ARR=$800,000$8,000,000=10%

Therefore, accounting rate of return is 10%.

Working Note:

1

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