Larry's Lanterns is considering a project which will produce sales of $250,000 a year for the next five years.The profit margin is estimated at 5%.The project will cost $300,000 and be depreciated straight-line to a book value of zero over the life of the project.Larry's has a required accounting return of 8%.This project should be _____ because the AAR is ____.
A)rejected; 4.14%
B)rejected; 6%
C)rejected; 8.33%
D)accepted; 8.33%
E)accepted; 9.93%

Question

Quizplus · Accepted Answer

The AAR is calculated as follows:AAR = (Annual Profit / Initial Investment) * 100%AAR = ($250,000 * 0.05 / $300,000) * 100%AAR = 8.33%Since the AAR (8.33%) is greater than the required accounting return (8%), the project should be accepted.

Larry's Lanterns Is Considering a Project Which Will Produce Sales