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ch21 - 21-7 The accrual accounting rate-of-return(AARR...

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21-7 The accrual accounting rate-of-return (AARR) method divides an accrual accounting measure of average annual income of a project by an accrual accounting measure of investment. The strengths of the accrual accounting rate of return method are that it is simple, easy to understand, and considers profitability. Its weaknesses are that it ignores the time value of money and does not consider the cash flows for a project. 21-18 (30 min.) Capital budgeting methods, no income taxes. The table for the present value of annuities (Appendix B, Table 4) shows: 10 periods at 14% = 5.216 1a. Net present value = \$28,000 (5.216) – \$110,000 = \$146,048 – \$110,000 = \$36,048 b. Payback period = 000 , 28 \$ 000 , 110 \$ = 3.93 years c. Internal rate of return: \$110,000 = Present value of annuity of \$28,000 at R% for 10 years, or what factor (F) in the table of present values of an annuity (Appendix B, Table 4) will satisfy the following equation. \$110,000 = \$28,000F F = 000 , 28 \$ 000 , 110 \$ = 3.929 On the 10-year line in the table for the present value of annuities (Appendix B, Table 4), find the column closest to 3.929; 3.929 is between a rate of return of 20% and 22%.

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