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2. Max Ltd requires an average accounting return (AAR) of at least 30% on all fixed asset purchases. Currently, Max is considering some new equipment
2. Max Ltd requires an average accounting return (AAR) of at least 30% on all fixed asset purchases. Currently, Max is considering some new equipment costing $112000. These assets will be fully depreciated in 3 years. The annual profit for the year (or period) from this project is estimated at $5600, $11 900 and $16 300 for the three years. Should you accept this project based on the accounting rate of return? Why or why not? A. Yes; because the AAR is less than 30%. B. Yes; because the AAR is equal to 30%. C. Yes; because the AAR is greater than 30%. D. No; because the AAR is less than 30%. 3. You are considering an investment for which you require a rate of return of 9.6%. The investment costs $102000 and will produce cash inflows of $37000 per year for three years. Should you accept this project based on its internal rate of return? Why or why not? A. Yes; because the IRR is 4.35%. B. Yes; because the IRR is 9.60%. C. Yes; because the IRR is 5.25%. D. No; because the IRR is 4.35%
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