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6. Average Accounting Return The Patches Group has invested $27,000 in a high. three years. Depreiation is $8,100, $12,400, and $6,500 in Years 1, 2, and 3ject project generates earnings before tax of $3,340 each yer. If the tax rate is 25 in a high-tech p , respectively S 25 percent, what is the projects average accounting return (AAR)?

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Answer #1

ARR = average Annual profit / Average Investment

Where,

Average investment = (book value at year 1+ book value at end of useful life) / 2

Average annual profit = total profit over investment period/number of years.

Initial Investment $27,000

Year

Profit ($)

Depreciation ($)

Tax $(at 25%)

Net Profit $(Profit - Tax)

1

3,340

8,100

835

2,505

2

3,340

12,400

835

2,505

3

3,340

6,500

835

2,505

                            

Book Value of the Project/Investment = $27,000

Average investment =

$27000/2 = $13,500

Average annual profit =

$(2505+2505+2505)/3 = $2505

ARR =

$2505/$13,500x100 = 18.55%
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