A project has average net income of £2,100 a year over its 4-year life.The initial cost of the project is £65,000 which will be depreciated using straight-line depreciation to a book value of zero over
The life of the project.The ﬁrm wants to earn a minimal average accounting return of 8.5%.The ﬁrm
Should _____ the project based on the AAR of _____.
A)accept; 6.46%
B)accept; 9.69%
C)accept; 12.92%
D)reject; 6.46%
E)reject; 12.92%

Question

Quizplus · Accepted Answer

Explanation: Average Accounting Return (AAR) is calculated as the average net income divided by the average investment. The average investment is the sum of the beginning and ending book values divided by 2. In this case, the beginning book value is £65,000 and the ending book value is £0, so the average investment is (£65,000 + £0) / 2 = £32,500. The average net income is £2,100. Therefore, AAR = (£2,100 / £32,500) * 100 = 6.46%. Since the firm wants a minimum AAR of 8.5%, and 6.46% is below this threshold, the firm should reject the project.

A Project Has Average Net Income of £2,100 a Year