Which One of the Following Statements Is Correct Concerning the Average

question 221

Multiple Choice

Which one of the following statements is correct concerning the average accounting return (AAR) ?

• A) The average book value used in the AAR formula will always equal one-half of the initial investment as long as straight-line depreciation over the life of the project is used.
• B) The average net income is the same as the total cash flows from the project minus the initial cash outflow to start the project.
• C) The AAR is similar to the profitability index in that both are based on accounting values rather than financial cash flows.
• D) Under the AAR rule, a project should be accepted if the targeted AAR is greater than the project's AAR.
• E) The AAR is a true financial rate of return, which is relatively easy to compute.

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