The annual end-of-year book-investment accounts for the

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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?

Reference no: EM13574444

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