Question

A firm spends $29,800 on new equipment that has a 3-year MACRS life, and a 5-year useful life. The company expects the following net, after-tax accounting income to be earned as a result of owning the asset over its useful life. The firm's WACC is 8%, and its tax rate is 20%. Show all work a) Calculate the Average Accounting Return: t=1 | After-tax annual accounting return 2,800 2 2,900 3 3,200 4 3,300 5 3,500 Average Accounting Return b) Calculate the Average Book value of the new equipment T= O1 2 Book Value: 3 4 Average Book Value: c) Calculate the Accounting Return for this investment: (round as XX.X%) MACRS 3-year schedule (rounded) year: 1 2 3 30% 40% 20% 4 10%

Please show any and all work or sub-calculations.

Answer 1

a.

	t = 1	2	3	4	5
After-tax annual accounting return	2,800	2,900	3,200	3,300	3,500
Average accounting return					3,140

b.

	T-0	1	2	3	4	5
Book Value	29,800	20,860	8,940	2,980	0	0
Average Book Value						12,516

c. Average accounting return on investment = $ 3,140 / $ 12, 516 * 100 = 25.1 %