Assume a project has an initial cost of $48,000 and will produce net income for 5 years.The project will use straight-line depreciation over the life of the project.The AAR of this project can be computed as
A)(Sum of all net income / 5)/ ($48,000 / 2)
B)(Sum of all net income / 2)/ ($48,000 / 2)
C)($48,000 / 5)/ (Sum of all net income / 5)
D)($48,000 / 2)/ (Sum of all net income / 2)
E)(Sum of all net income / 5)/ $48,000

Question

Quizplus · Accepted Answer

The Average Accounting Return (AAR) is calculated by dividing the average net income of the project by the average book value of the investment. Since the project uses straight-line depreciation, the average book value equals half of the initial cost. Therefore, the formula for AAR is:
(Sum of all net income / 5) / ($48,000 / 2) = (Sum of all net income / 5) / $24,000. 
This matches choice A.

Assume a Project Has an Initial Cost of $48,000 and Will