A project has an initial cost of $32,000 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,300,and $1,800 a year for the next 3 years,respectively.What is the average accounting return?
A)8.72 percent
B)11.04 percent
C)11.26 percent
D)14.69 percent
E)15.14 percent

Question

Quizplus · Accepted Answer

The average accounting return (AAR) is calculated as the average net income divided by the average book value. The initial cost is $32,000, and it depreciates to $0 over 3 years, so the average book value is $32,000/2 = $16,000 (since it's a straight-line depreciation to zero, the midpoint value is used). The average net income over the 3 years is ($1,200 + $2,300 + $1,800) / 3 = $1,766.67. Therefore, AAR = ($1,766.67 / $16,000) * 100 = 11.04 percent.

A Project Has an Initial Cost of $32,000 and a 3-Year