An investment has an initial cost of $300,000 and a life of four years.This investment will be depreciated by $60,000 a year and will generate the net income shown below.Should this project be accepted based on the average accounting rate of return (AAR)if the required rate is 9.5 percent? Why or why not?

A)Yes, because the AAR less than 9.5 percent
B)Yes, because the AAR is 9.5 percent
C)Yes, because the AAR is greater than 9.5 percent
D)No, because the AAR is 9.5 percent
E)No, because the AAR is greater than 9.5 percent

Question

An investment has an initial cost of $300,000 and a life of four years.This investment will be depreciated by $60,000 a year and will generate the net income shown below.Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent? Why or why not?

A)Yes, because the AAR less than 9.5 percent 
B)Yes, because the AAR is 9.5 percent 
C)Yes, because the AAR is greater than 9.5 percent 
D)No, because the AAR is 9.5 percent 
E)No, because the AAR is greater than 9.5 percent

Quizplus · Accepted Answer

Average net income = ($14,500 + $16,900 + $19,600 + $23,700)/4 = $18,675Average book value = ($300,000 + $240,000 + $180,000 + $120,000 + $60,000)/5 = $180,000AAR = $18,675/$180,000 = 10.38 percentThe project should be accepted because the AAR is greater than the required return.

An Investment Has an Initial Cost of $300,000 and a Life