Question

The Patches Group has invested $25,000 in a high-tech project lasting three years. Depreciation is $7,700, $10,900, and $6,400 in Years 1, 2, and 3, respectively. The project generates pretax income of $3,470 each year. The pretax income already includes the depreciation expense. The tax rate is 30 percent.

What is the project’s average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

AAR %

Answer 1

Net income = Pre tax income (1- tax)

Net income = 3,470 (1 - 0.3)

Net income = 2,429

Average income = (2,429 + 2,429 + 2,429)/ 3

Average income = 2,429

Book value = 25,000 - 7,700 - 10,900 - 6,400

Book value = 0

Average investment = (Iniial investment - book value) / 2

Average investment = (25,000 - 0)/ 2

Average investment = 12,500

average accounting return = (Net income / average investment) * 100

average accounting return = (2,429 /12,500) * 100

average accounting return = 19.43%