AAR - Average Accounting Rate of Return

CFA Level I
#1

Columbus Sign Co invests $270,000 in a project that is depreciated on a straightline basis over 3 years to a zero salvage value. Details for the project over its 3-year life are as follow: ------------------Year 1----------------Year 2-----------------Year 3 Sales----------220,000-------------190,000---------------200,000 Depreciation–90,000---------------90,000----------------90,000 Net Income-- 56,000---------------42,000-----------------35,000 The AAR for the project is closest to: A. 8.9% B. 16.4% C. 32.8% D. 49.3%

#2

avg net income = 44.33 Avg book value = 270 + 0 / 2 = 135 AAR = 44.33 / 135 = 32.84% Choice C

#3

avg ni/avg bk value=44.33/135=32.8% C

#4

c aar=((56+42+35)/3)/((270-0)/2)=0.328

#5

why am i never the first… cpk take a break… lol

#6

This is really fast, guys :slight_smile: Can someone elaborate why average book value is not (270-0)/3? Why denominator is 2 but the project life is 3 years?

#7

I think it is the avg of starting value and salvage value.