A project has an initial cost of $31,300 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the average accounting return?
A) 12.79 percent
B) 11.82 percent
C) 10.35 percent
D) 11.69 percent
E) 10.14 percent

Question

Quizplus · Accepted Answer

Step 1: Calculate the average net income: 
Average net income = (1750+2100+1700)/3 = $1850

Step 2: Calculate the average investment:
Average investment = (Initial cost + Salvage value) / 2 
Since the salvage value is zero, the average investment is $15,650 = (31,300+0)/2

Step 3: Calculate the average accounting return (AAR):
AAR = (Average net income / Average investment) x 100%
AAR = (1,850 / 15,650) x 100% = 11.82%

Therefore, the average accounting return is 11.82%, which corresponds to choice B.

A Project Has an Initial Cost of $31,300 and a Three-Year