Question

Pluto Corporation is considering an investment that will cost $210,000 and last for three years. The investment will be amortized on a straight-line basis over that period. Earnings generated by the investment before amortization and taxes over this period are as follows:

Year 1	110,000
Year 2	120,000
Year 3	150,000

Pluto Corporation has a tax rate of 25 percent. What is the AAR of this project? (Round the final answer to 2 decimal places.)

Answer 1

	Calculation of net income
		Year 1	Year 2	Year 3
	Earning before amortization	$        1,10,000	$        1,20,000	$        1,50,000
	Less:
	Amortization	$            70,000	$            70,000	$            70,000
	Taxable income	$            40,000	$            50,000	$            80,000
	Tax Expenses at 25%	$            10,000	$            12,500	$            20,000
	Net Income	$            30,000	$            37,500	$            60,000
	Average net income = (30000+37500+60000)/3
	=$42500
	Average Investment = (beginning Investment + ending Investment)/2
	= ( $210000+0)/2
	= $ 105000
	Average Accounting Rate of return = Average Income /average investment
	=$42500/105000
	=40.48%

Please upvote.