You're Trying to Determine Whether or Not to Expand Your

question 58

Multiple Choice

You're trying to determine whether or not to expand your business by building a new manufacturing plant.The plant has an installation cost of $29 million, which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $1,848,000, $2,080,000, and $2,720,000 over these three years, what is the project's average accounting return (AAR) ?

• A)14.69 percent
• B)14.14 percent
• C)15.03 percent
• D)15.28 percent
• E)14.21 percent

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Definitions:

Variable Costing

An accounting method that only includes variable production costs (costs that change with output level) in the cost of goods sold and inventory valuation.

Product Costs

The total costs associated with making or acquiring any products, including materials, labor, and overhead.

Raw Material

Basic substances in their natural, modified, or unprocessed states used as inputs to production or manufacturing.

Inventory

Goods and materials that a business holds for the ultimate goal of resale or production.