Question

The Patches Group has invested $39,000 in a high-tech project lasting three years. Depreciation is $13,300, $16,500, and $9,200 in Years 1, 2 and 3, respectively. The project generates pretax income of $4.310 each year. The pretax income already includes the depreciation expense. The tax rate is 35 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 14.37 %

Answer 1

Initial Investment = $39,000

Pretax Income = $4,310

Tax Rate = 35%

After tax Income = $4,310 * (1 - tax rate) = $4,310 * (1-35%) = $2,801.5

After tax income for 3 years = 3 * 2,801.5 = $8,404.5

Average After Tax income = After tax income for 3 years /3 = $8,404.5 / 3

Average Accounting Return = Average After Tax income / Initital Investment

= $2,801.5 / $39,000

= 0.0718333

= 7.18%

Therefore, Accounting Rate of Return = 7.18%