The Depot is considering a project with annual sales of $325,000 for four years.The profit margin is 4.65 percent.The initial cost for equipment will be $330,000.The equipment will be depreciated by $55,000 each year.The required average accounting rate of return is 11.4 percent.Should this project be accepted or rejected? What is the AAR?
A)Rejected;6.52%
B)Rejected;6.87%
C)Rejected;7.85%
D)Accepted;6.87%
E)Accepted;7.85%

Question

Quizplus · Accepted Answer

Average net income $325,000 × .0465 = $15,112.50Average book value = ($330,000 + 275,000 + 220,000 + 165,000 + 110,000)/5 = $220,000AAR = $15,112.50/$220,000 = .0687,or 6.87%

The Depot Is Considering a Project with Annual Sales of $325,000