Chesapeake Chandlery is considering the development of on-line sales of its boating products. The necessary inventory and distribution capabilities are already in place; however, the company would invest $800,000 to develop the necessary online storefront. The investment would have an expected economic life of six years with an expected salvage value of $25,000 at the end of its life. At the end of the fourth year, the firm anticipates it would spend $80,000 for online advertising and updating of its Web site. This amount would be fully deductible for tax purposes in the year incurred. Management requires that investments of this type be recouped in four years or less. The pretax increase in income is expected to be $175,000 in each of the first four years and $132,000 in each of the next two years. The companys discount rate is 10 percent; its tax rate is 30 percent; and the investment would be depreciated for tax purposes using the straight-line method with no consideration of salvage value over a period of five years.

The present value of US$ 1 at 10 % discount rate

year	1	2	3	4	5	6
10%	0.9091	0.8264	0.7513	0.6830	0. 6209	0 .5645

Required:

1.Calculate the Accounting Rate of Return on the project.

2.Calculate the Internal Rate of Return on the project.

3.Calculate the Profitability Index on the project.

4.What are the underlying assumptions and limitations of each capital project evaluation method?