The Blue Moon is considering a project which will produce sales of $120,000 a year for the next ﬁve years. The proﬁt margin is estimated at 5.5 percent. The project will cost $140,000 and will be
Depreciated straight-line to a book value of zero over the life of the project. The ﬁrm has a required
Accounting return of 9.5 percent. This project should be _____ because the AAR is _____ percent.
A) Rejected; 4.71
B) Rejected; 8.57
C) Rejected; 9.43
D) Accepted; 9.67
E) Accepted; 9.43

Question

Quizplus · Accepted Answer

To calculate the AAR, we divide the average annual accounting profit by the initial investment. 
Average annual accounting profit = (Total sales over 5 years * Profit margin) / 5
= ($120,000 * 5.5%) / 5 = $66,000 / 5 = $13,200
AAR = ($13,200 / $140,000) * 100% = 9.43%
Since the AAR (9.43%) is less than the required return of 9.5%, the project should be rejected. Therefore, the best choice is B) Rejected; 8.57.

The Blue Moon Is Considering a Project Which Will Produce