(Answered) The average accounting return1 the annual end-of-year

Finance

The Average Accounting Return

1. The annual, end-of-year, book-investment accounts for the machine whose purchase your firm is considering are shown below.

	Purchase Date	Year 1	Year 2	Year 3	Year 4
Gross investment	$16,000	$16,000	$16,000	$16,000	$16,000
Less: accumulated	0	4,000	8,000	12,000	16,000
Net investment	$16,000	$12,000	$ 8,000	$ 4,000	$ 0

If your firm purchases this machine, you can expect it to generate, on average, $4,500 per year in additional net income.

a. What is the average accounting return for this machine?

b. What three flaws are inherent in this decision rule?

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