A Project Has Average Net Income of $2,100 a Year

question 86

Multiple Choice

A project has average net income of $2,100 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimal average accounting return of 8.5 %. The firm should _____ the project based on the AAR of _____

• A) Accept; 6.46 %.
• B) Accept; 9.69 %.
• C) Accept; 12.92 %.
• D) Reject; 6.46 %.
• E) Reject; 12.92 %.

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Definitions:

Intrinsic Value

The actual, fundamental worth of an asset, investment, or company, based on underlying perception of its true value including all aspects of the business.

Time Premium

The additional amount that buyers are willing to pay for an option beyond its intrinsic value, reflecting the potential for value increase over time.

Equity Investors

Individuals or entities that invest money into a company in exchange for ownership equity or stock.

Owner

An individual or entity that holds legal title to an asset or property, having the rights to use, sell, or lease it.