The Drive-Thru Requires an Average Accounting Return (AAR) of at Least

question 49

Multiple Choice

The Drive-Thru requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $168,000. This equipment will have a 4-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 $8,100, $10,300, $17,900, and $19,600 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 percent
• B) Yes; because the AAR is equal to 17 percent
• C) Yes; because the AAR is greater than 17 percent
• D) No; because the AAR is less than 17 percent
• E) No; because the AAR is greater than 17 percent

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Definitions:

Partnership Firm

A business entity created when two or more individuals agree to share the profits and losses of a business venture.

Indemnified

Protected against loss, damage, or legal liability through a legal agreement or insurance.

Expenditures

Money spent or costs incurred in the course of conducting business or achieving a project.

Personal Funds

Money that belongs to an individual and is used for personal, as opposed to business or other external, purposes.