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.)

I have seen the answers 19.43% and 29.14%. These are both incorrect.

Answer 1

	1	2	3
Pretax Income	7700	10900	6400
less:tax expense	(2310)	(3270)	(1920)
Net Income	5390	7630	4480

Average Income = [5390+7630+4480]/3

                 = 17500/3

                 = 5833.3333

Average Investment = [Beginning value +Ending value]/2

            = [25000+ 0]/2

             =25000/2

             = 12500

Average accounting return = Average Income /Average Investment

                    = 5833.3333/12500

                    = .4667 or 46.67%