The manager at Northern Neck Manufacturing reported a need to purchase a new machine to clean and process fresh shrimp
In its simple form, the average investment is calculated as the arithmetic mean of the net initial investment at $650,000 and a net terminal cash flow of $24,000. The managerial accountant reports that the net terminal value of the new machine is $0, plus the net terminal amount of working capital is $24,000. The increase in expected annual after-tax income is expected at $34,000.
Required
Compute the average investment over 5 years. Compute the AARR on average investment.
What will be an ideal response?
The average investment over 5 years is $337,000. The AARR on this average investment is 10%.
Explanation: Average investment: [($650,000 + $24,000 / 2)] = $337,000
AARR on average investment: [($34,000 / $337,000 )] = .10, or 10%
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