CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting
A firm sets a target ARR of 18% on initial investment. Project P costs Rs 5,00,000 and yields average annual accounting profit of Rs 80,000. Project Q costs Rs 4,00,000 and yields Rs 76,000. Which decision follows?
Accept Q only. Project P earns 16 percent on its Rs 5,00,000 cost, below the 18 percent target, while Project Q earns 19 percent on Rs 4,00,000, which exceeds the target.
- AAccept P only
- BAccept Q onlyCorrect
- CAccept both
- DReject both
Explanation
ARR of P = 80,000/5,00,000 = 16%, below 18%. ARR of Q = 76,000/4,00,000 = 19%, above 18%. So only Q meets the target.
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