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3. Average accounting rate of return (ARR): Capitol Corp. is expecting a project to generate after-tax...

3. Average accounting rate of return (ARR): Capitol Corp. is expecting a project to generate after-tax income of $63,435 over each of the next three years. The average book value of its equipment over that period will be $212,500. If the firm’s acceptance decision on any project is based on an ARR of 37.5 percent, should this project be accepted? PLEASE TYPE THE ANSWER

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Answer #1

Annual after-tax income = $63,435

Average after-tax income = ($63,435 +$63,435 + $63,435) / 3 = $63,435

Average book value of equipment = $212,500

Accounting rate of return = Average after-tax income / Average book value = $63,435 / $212,500 = 29.9%

Since the project’s ARR is below the acceptance rate of 37.5 percent, the project should be rejected.

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