An investment has an initial cost of $420,000 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 16 percent? Why or why not?

A)Yes, because the AAR is equal to 16 percent
B)Yes, because the AAR is greater than 16 percent
C)Yes, because the AAR is less than 16 percent
D)No, because the AAR is greater than 16 percent
E)No, because the AAR is less than 16 percent

Question

An investment has an initial cost of $420,000 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 16 percent? Why or why not?

A)Yes, because the AAR is equal to 16 percent 
B)Yes, because the AAR is greater than 16 percent 
C)Yes, because the AAR is less than 16 percent 
D)No, because the AAR is greater than 16 percent 
E)No, because the AAR is less than 16 percent

Quizplus · Accepted Answer

AAR = [($21,000 + $24,800 + $37,500 + $45,000)/4]/[($420,000 + $0)/2] = 15.27 percentBecause the AAR is less than the required rate, the project should be rejected.

An Investment Has an Initial Cost of $420,000 and Will