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?




Year Net Income


1 $ 14,500


2 16,900


3 19,600


4 23,700

Answer 1

Answer:

Yes as the average accounting rate of return is higher than 9.45%

Explanation:

The computation of given question is shown below:-

Average income = ($14,500  + $16,900  + $19,600  + $23,700) ÷ 4

= $74,700 ÷ 4

= $18,675

Now,

Average investment = ($300,000 + 0) ÷ 2

= $150,000

So,

Average accounting rate of return = Average income ÷ Average investment

= $18,675 ÷ $150,000

= 12.45

So, Yes as the average accounting rate of return is higher than 9.45%