Larry's Lanterns Is Considering a Project Which Will Produce Sales

question 208

Multiple Choice

Larry's Lanterns is considering a project which will produce sales of $240,000 a year for the next five years. The profit margin is estimated at 6 percent. The project will cost $290,000 and be
Depreciated straight-line to a book value of zero over the life of the project. Larry's has a required
Accounting return of 8 percent. This project should be _____ because the AAR is _____

• A) Rejected; 4.14 percent.
• B) Rejected; 6 percent.
• C) Rejected; 8.28 percent.
• D) Accepted; 8.28 percent.
• E) Accepted; 9.93 percent.

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Definitions:

Financial Lease

A long-term, non-cancellable lease contract where the lessee is responsible for maintenance and has the option to acquire ownership at the end of the lease term.

Capital Lease

A lease agreement that allows a lessee to effectively purchase an asset over time through lease payments, characterized by the transfer of ownership rights of the asset from the lessor to the lessee.

Accountants

Professionals who practice accounting, which involves financial reporting, tax, auditing, and analysis.

Operating Lease

A lease agreement for the use of equipment or property for a shorter period than the asset's life expectancy, without transferring ownership rights.