Uchdorf 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.

Accounting rate of return =  24.10%

Explanation:

The accounting rate of return is the average annual income expressed as a percentage of the average investment.  

The simple rate of return can be calculated using the two formula below:  

Accounting rate of return  

= Annual operating income/Average investment × 100  

Average investment = (Initial cost + scrap value)/2  

Average profit = Total profit over investment period / Number of years

Total profit = 360,000 + 360,000 + 600,000 +1,080,000, + 1,200,000 + 2,520,000  + 1,444,000 =  7,564,000.00  

Average annual profit = 7,564,000/7 = 1,080,571.43  

Average Investment  = 9,000,000/2= 4500000

Accounting rate of return = 1,080,571.43  /4,500,000 × 100 = 24.10%

Accounting rate of return =  24.10%

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