Problem Set 3 1. (Total 25points) Average accounting return (AAR) is an investment's average net income...

 

 

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Problem Set 3 1. (Total 25points) Average accounting return (AAR) is an investment's average net income divided by its average book value: Let's consider the scenario of potentially opening a store in a new shopping mall. To proceed, we need to invest $750,000 in improvements. The store's operational life spans five years, after which all assets revert to the mall owners. For accounting purposes, the investment would be depreciated at a rate of 100% straight-line over five years, resulting in $150,000 depreciation annually. The applicable tax rate stands at 21%. Fill in the unknow numbers, each box for 1 point. (20 points) What is the AAR? (5 points) Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $500,000 $450,000 $250,000 $200,000 $150,000 Expenses 200,000 150,000 100,000 100,000 100,000 Earnings $ XXXXX $ XXXXX $ XXXXX $ XXXXX $ XXXXX before depreciation Depreciation 100,000 100,000 100,000 100,000 100,000 Earnings $ XXXXX $ XXXXX $ XXXXX $ XXXXX - $ XXXXX before taxes Taxes (25%) XXXXX XXXXX XXXXX XXXXX XXXXX Net income $ XXXXXXX $ XXXXXXX $ XXXXXXX $ XXXXXXX $ XXXXXXX Problem Set 3 1. (Total 25points) Average accounting return (AAR) is an investment's average net income divided by its average book value: Let's consider the scenario of potentially opening a store in a new shopping mall. To proceed, we need to invest $750,000 in improvements. The store's operational life spans five years, after which all assets revert to the mall owners. For accounting purposes, the investment would be depreciated at a rate of 100% straight-line over five years, resulting in $150,000 depreciation annually. The applicable tax rate stands at 21%. Fill in the unknow numbers, each box for 1 point. (20 points) What is the AAR? (5 points) Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $500,000 $450,000 $250,000 $200,000 $150,000 Expenses 200,000 150,000 100,000 100,000 100,000 Earnings $ XXXXX $ XXXXX $ XXXXX $ XXXXX $ XXXXX before depreciation Depreciation 100,000 100,000 100,000 100,000 100,000 Earnings $ XXXXX $ XXXXX $ XXXXX $ XXXXX - $ XXXXX before taxes Taxes (25%) XXXXX XXXXX XXXXX XXXXX XXXXX Net income $ XXXXXXX $ XXXXXXX $ XXXXXXX $ XXXXXXX $ XXXXXXX