Woodcrafters requires an average accounting return (AAR)of at least 17 percent on all fixed asset purchases.Currently,it is considering some new equipment costing $178,000.This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value.The annual net income from this equipment is estimated at $10,100,$10,300,$17,900,and $19,600 for the four years.Should this purchase occur based on the accounting rate of return? Why or why not?
A)Yes, because the AAR is less than 17 percent
B)Yes, because the AAR is equal to 17 percent
C)Yes, because the AAR is greater than 17 percent
D)No, because the AAR is less than 17 percent
E)No, because the AAR is greater than 17 percent

Question

Quizplus · Accepted Answer

AAR = [($10,100 + $10,300 + $17,900 + $19,600)/4]/[($178,000 + $0)/2] = 16.26 percentBecause the AAR is less than the required rate, the equipment should not be purchased.

Woodcrafters Requires an Average Accounting Return (AAR)of at Least 17