An investment has an initial cost of $320,000 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 percent? Why or why not?
A) Yes; because the AAR less than 9 percent
B) Yes; because the AAR is 9 percent
C) Yes; because the AAR is greater than 9 percent
D) No; because the AAR is 9 percent
E) No; because the AAR is greater than 9 percent

Question

An investment has an initial cost of $320,000 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 percent? Why or why not? 
A) Yes; because the AAR less than 9 percent 
B) Yes; because the AAR is 9 percent 
C) Yes; because the AAR is greater than 9 percent 
D) No; because the AAR is 9 percent 
E) No; because the AAR is greater than 9 percent

Quizplus · Accepted Answer

To calculate the AAR, we need to first find the average net income over the life of the investment by adding up the net income for each year and dividing by the number of years:

Average net income = (150,000 + 180,000 + 200,000 + 220,000) / 4 = 187,500

Then we divide the average net income by the initial cost of the investment and multiply by 100 to get the AAR in percentage:

AAR = (187,500 / 320,000) x 100 = 58.59%

Since the required rate of return is 9 percent and the AAR is greater than 9 percent, the project should be accepted based on the average accounting rate of return. Therefore, the best choice is C.

An Investment Has an Initial Cost of $320,000 and a Life