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? $$\begin{array} { | c | r | }
\hline \text { Year } & \text { Net Income } \
\hline 1 & \$ 14,500 \
\hline 2 & 16,900 \
\hline 3 & 19,600 \
\hline 4 & 23,700 \
\hline
\end{array}$$
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? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Net Income } \
\hline 1 & \$ 14,500 \
\hline 2 & 16,900 \
\hline 3 & 19,600 \
\hline 4 & 23,700 \
\hline
\end{array}$$
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

The average accounting rate of return (AAR) is calculated by dividing the average net income of the project by the initial investment cost.

First, we need to find the average net income:
Average Net Income = (14,500 + 16,900 + 19,600 + 23,700)/4 = $18,175

Now we can calculate the AAR:
AAR = (Average Net Income / Initial Investment) x 100%
AAR = (18,175/300,000) x 100%
AAR = 6.06%

Since the required rate of return is 9.5 percent, the AAR (6.06%) is less than the required rate of return. Therefore, we should accept the project. Choice C is the correct answer.

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