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 over the project's life by the average book value of the investment. Since straight-line depreciation is used, the average book value is the initial cost divided by 2. Therefore, the formula for AAR is:

AAR = (Average net income / Number of years) / (Initial cost / 2)

Substituting the given values:

AAR = (Sum of all net income / 5) / ($48,000 / 2)

So, the correct choice is A.

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