Woodcrafters Requires an Average Accounting Return (AAR) of at Least

question 34

Multiple Choice

Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases.Currently, it is considering some new equipment costing $169,700.This equipment will have a four-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 equipment is estimated at $7,100, $13,300, $18,600, and $19,200 for the four years.Should this purchase occur based on the accounting rate of return? Why or why not?

• A)Yes; because the AAR is less than 17.5 percent
• B)Yes; because the AAR is equal to 17.5 percent
• C)Yes; because the AAR is greater than 17.5 percent
• D)No; because the AAR is less than 17.5 percent
• E)No; because the AAR is greater than 17.5 percent

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Definitions:

Breadwinner

A person who earns money to support their family, typically the sole or primary earner in a household.

Discretionary Income

Money remaining after the costs of basic necessities have been paid.

Basic Necessities

Essential items required for survival, including food, clothing, shelter, and clean water.

Lack of Education

A state or condition where an individual has not received sufficient formal learning or instruction.