You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.

\begin{array}{l}\begin{array} { | l | l | l | } \hline \text { Year } & \text { Project A } & \text { Project B } \\\hline 0 & £ 75,000 & £ 70,000 \\\hline 1 & £ 19,000 & £ 10,000 \\\hline 2 & £ 48,000 & £ 16,000 \\\hline 3 & £ 12,000 & £ 72,000 \\\hline\end{array}\\\begin{array} { | l | l | l | } \hline & \text { Project A } & \text { Project B } \\\hline \text { Required rate of return } & 10 \% & 13 \% \\\hline \text { Required payback period } & 2.0 \text { years } & 2.0 \text { years } \\\hline \text { Required accounting return } & 8 \% & 11 \% \\\hline\end{array}\end{array}

Based upon the average accounting return (AAR) and the information provided in the problem, you:
A)should accept both project A and project B.
B)should accept project A because the AAR exceeds the required rate.
C)should accept project A because the AAR is less than the required rate.
D)should accept whichever project you prefer as they are equivalent from an AAR
Perspective.
E)cannot compute the AAR of either project.

If a Project Is Assigned a Required Rate of Return

Multiple Choice

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