Question 3

Taomi Ltd, a competitor of Kievon Ltd, also intends to venture into the hair straightening dryer market. They have estimated the initial investment to be similar to Kievon's $4 million, and installation cost would be an additional $150 000.

Year (t) 1 2 3 4 5

Net Profit 900 000 1 800 000 2 000 000 2 000 000 1 500 000

Taomi has estimated the annual net profits (after tax) as follows:

(a)Calculate the Accounting Rate of Return for this project.

(b)Discuss one advantage the ARR method has over the other investment appraisal methods from a shareholder's point of view.