QUESTION 1

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. Should you accept or reject these projects based on the average accounting return?

Project A	Project B
Year	Cash Flow	Year	Cash Flow
0	-$87,000	0	-$85,000
1	$31,000	1	$15,000
2	$37,000	2	$20,000
3	$44,000	3	$90,000
Required rate of return	12%	Required rate of return	14%
Required payback period	2.5 years	Required payback period	2.5 years
Required accounting return	10%	Required accounting return	11%