A Project Produces Annual Net Income of $9,500, $12,500, and $15,500

question 83

Multiple Choice

A project produces annual net income of $9,500, $12,500, and $15,500 over the three years of its life, respectively. The initial cost of the project is $260,400. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 7 %?

• A) 4.80 %
• B) 7.32 %
• C) 8.97 %
• D) 9.60 %
• E) 10.27 %

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Definitions:

Present Value

The existing value of a forthcoming sum of money or cash flow sequence, adjusted for a specific return rate.

Inflation

The rate at which the general level of prices for goods and services is rising, eroding purchasing power.

Great Recession

The severe global economic downturn that took place from late 2007 through early 2009, marked by significant declines in consumer wealth, financial markets, and economic activity worldwide.

Profits

The financial gain that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes involved in sustaining the activity.