Your firm requires an average accounting return (AAR)of at least 15 per cent on all fixed Asset purchases.Currently,you are considering some new equipment costing $96 000.This equipment will have a three-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 project is estimated at $5500,$12 400,and $17 600 for the three years.Should you accept this project based on the accounting rate of return? Why or why not?
A)yes;because the AAR is less than 15 per cent
B)yes;because the AAR is equal to 15 per cent
C)yes;because the AAR is greater than 15 per cent
D)no;because the AAR is less than 15 per cent
E)no;because the AAR is equal to 15 per cent

Question

Quizplus · Accepted Answer

The AAR is calculated as the average annual net income divided by the initial investment. In this case, the average annual net income is ($5500 + $12400 + $17600) / 3 = $11833.33. The initial investment is $96000. Therefore, the AAR is $11833.33 / $96000 = 12.3%. Since the AAR is greater than the required 15%, the project should be accepted.

Your Firm Requires an Average Accounting Return (AAR)of at Least