An investment has an initial cost of $3.3 million.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not?

A)Yes, because the AAR is 10.0 percent
B)Yes, because the AAR is less than 10.0 percent
C)Yes, because the AAR is greater than 10.0 percent
D)No, because the AAR is greater than 10.0 percent
E)No, because the AAR is less than 10.0 percent

Question

An investment has an initial cost of $3.3 million.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not?

A)Yes, because the AAR is 10.0 percent 
B)Yes, because the AAR is less than 10.0 percent 
C)Yes, because the AAR is greater than 10.0 percent 
D)No, because the AAR is greater than 10.0 percent 
E)No, because the AAR is less than 10.0 percent

Quizplus · Accepted Answer

Average net income = ($211,700 + $186,400 + $165,500)/3 = $187,866.67Average book value = ($3.3m + $2.4m + $1.5M + 0.6m)/4 = $1.95mAAR = $187,866.67/$1.95m = 9.63 percentThe AAR is less than the requirement, so the investment should be rejected.

An Investment Has an Initial Cost of $3