Question

The Green Fiddle is considering a project with sales of $86,800 a year for the next four years. The profit margin is 6 percent, the project cost is $97,500, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 10.8 percent. This project should be _____ because the AAR is _____ percent.

Answer 1

Answer:

This project should be rejected  because the AAR is 10.68 percent.

Explanation:

The accounting rate of return of the project needs to computed,compared with the required accounting rate of return  in order to decide whether the project should accepted or rejected:

Profit margin=$86,800*6%=$5208

Average operating assets=($97,500+$0)/2=$48.750

Accounting rate of return=profit margin/average operating assets*100

Accounting rate of return=$5,208/$48,750*100=10.68%

The project accounting rate of return is lower than the required accounting rate of return,hence the project should be rejected.