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

question 34

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:

NPV

Net Present Value represents the discrepancy between the current value of cash inflows and outflows throughout a specific timeframe, utilized in capital budgeting to evaluate an investment's profitability.

PI

Profitability Index (PI) is a ratio that calculates the relationship between the benefits of a project or investment and its costs, helping to determine its attractiveness.

IRR

Internal Rate of Return, a financial metric used to estimate the profitability of potential investments, calculating the interest rate at which the net present value of all cash flows (both positive and negative) from a project or investment equals zero.

Required Rate of Return

The minimum annual percentage return that an investor expects to achieve when investing in a particular asset or project.