Question

1) The Patches Group has invested $26,000 in a high-tech project lasting three years. Depreciation is $8,100, $11,300, and $6,600 in Years 1, 2, and 3, respectively. The project generates pretax income of $3,530 each year. The pretax income already includes the depreciation expense. The tax rate is 34 percent.

What is the project’s average accounting return (AAR)?

2)

Compute the internal rate of return for the cash flows of the following two projects: (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Year	Project A			Project B
0	–$	14,300		–$	11,900
1		5,600			3,000
2		6,400			8,900
3		5,200			4,800

	Internal rate of return
Project A		%
Project B		%

Answer 1

Q1.
Pre-tax income			3530
Less: tax @ 34%			1200
Afterr tax Income			2330
Divide: Average investment			26000
Accounting rate of return			8.96%
Q2
IRR of A
Year	Cashflows	PVF at 10%	Present value
0	-14300	1	-14300
1	5600	0.909091	5090.909
2	6400	0.826446	5289.256
3	5200	0.751315	3906.837
NPV			-12.9
Hence IRR of A = 10%
IRR of B
Year	Cashflows	PVF at 17.8%	Present value
0	-11900	1	-11900
1	3000	0.848896	2546.689
2	8900	0.720625	6413.564
3	4800	0.611736	2936.333
NPV			-3.4
Hence IRR of B = 17.80%