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1. Accounting Rate of Return

   Each of the following scenarios is independent. Assume that allcash flows are after-tax cash flows.

   1. Cobre Company is considering the purchase of new equipment thatwill speed up the process for extracting copper. The equipment willcost $3,800,000 and have a life of 5 years with no expected salvagevalue. The expected cash flows associated with the project are asfollows:

      Year		Cash Revenues		Cash Expenses
      1		$6,000,000		$4,800,000
      2	  6,000,000	  4,800,000
      3	  6,000,000	  4,800,000
      4	  6,000,000	  4,800,000
      5	  6,000,000	  4,800,000

   2. Emily Hansen is considering investing in one of the followingtwo projects. Either project will require an investment of $75,000.The expected cash revenues minus cash expenses for the two projectsfollow. Assume each project is depreciable.

      Year		Project A		Project B
      1		$22,500		$22,500
      2	  30,000	  30,000
      3	  45,000	  45,000
      4	  75,000	  22,500
      5	  75,000	  22,500

   3. Suppose that a project has an ARR of 30% (based on initialinvestment) and that the average net income of the project is$170,000.
   4. Suppose that a project has an ARR of 50% and that theinvestment is $225,000.

   Required:

   1. Compute the ARR on the new equipment thatCobre Company is considering. Round your answer to one decimalplace.
   %

   2. Conceptual Connection: Which project shouldEmily Hansen choose based on the ARR? Notice that the paybackperiod is the same for both investments (thus equally preferred).Unlike the payback period, explain why ARR correctly signals thatone project should be preferred over the other.

   	ARR
   Project A	%
   Project B	%

   Based on the ARR, Emily Hansen chosen Project A .

   3. How much did the company in Scenario cinvest in the project? Round your answer to the nearest wholedollar.
   $

   4. What is the average net income earned by theproject in Scenario d?
   $

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