Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases.Currently, it is considering some new equipment costing $169,700.This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value.The annual net income from this equipment is estimated at $7,100, $13,300, $18,600, and $19,200 for the four years.Should this purchase occur based on the accounting rate of return? Why or why not?
A)Yes; because the AAR is less than 17.5 percent
B)Yes; because the AAR is equal to 17.5 percent
C)Yes; because the AAR is greater than 17.5 percent
D)No; because the AAR is less than 17.5 percent
E)No; because the AAR is greater than 17.5 percent

Question

Quizplus · Accepted Answer

The AAR is calculated as the average annual net income divided by the initial investment. The average annual net income is ($7,100 + $13,300 + $18,600 + $19,200) / 4 = $14,050. The AAR is $14,050 / $169,700 = 8.28%, which is less than the required 17.5%.

Woodcrafters Requires an Average Accounting Return (AAR) of at Least