An investment has an initial cost of $462,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 14.75 percent? Why or why not? $$\begin{array} { | c | r | }
\hline \text { Year } & \text { Net Income } \
\hline 1 & \$ 27,000 \
\hline 2 & 24,800 \
\hline 3 & 37,500 \
\hline 4 & 45,000 \
\hline
\end{array}$$
A)Yes, because the AAR is equal to 14.75 percent
B)Yes, because the AAR is greater than 14.75 percent
C)Yes, because the AAR is less than 14.75 percent
D)No, because the AAR is greater than 14.75 percent
E)No, because the AAR is less than 14.75 percent

Question

An investment has an initial cost of $462,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 14.75 percent? Why or why not? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Net Income } \
\hline 1 & \$ 27,000 \
\hline 2 & 24,800 \
\hline 3 & 37,500 \
\hline 4 & 45,000 \
\hline
\end{array}$$
A)Yes, because the AAR is equal to 14.75 percent
B)Yes, because the AAR is greater than 14.75 percent
C)Yes, because the AAR is less than 14.75 percent
D)No, because the AAR is greater than 14.75 percent
E)No, because the AAR is less than 14.75 percent

Quizplus · Accepted Answer

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

Average net income = (27,000 + 24,800 + 37,500 + 45,000)/4 = $33,075

AAR = ($33,075/$462,000) x 100% = 7.15%

The required rate of return is 14.75%, which is greater than the AAR of 7.15%. Therefore, the project should not be accepted based on the average accounting rate of return.

An Investment Has an Initial Cost of $462,000 and Will