You are considering a project with an initial outlay of $340,000 and EBDIT of $105,000 in years 1-2 and $125,000 in years 3-4, respectively. For tax purposes, the machine can be depreciated on a straight-line basis till its book value of zero at the end of year four. That is, the after-depreciation taxable incomes of the project are as follows:

Year	0	1	2	3	4
EBDIT (000)		105	105	125	125
Depreciation	0	-85	-85	-85	-85
Taxable income	0	20	20	40	40

The current corporate tax rate is 30% and required rate of return is 10% p.a.

Required:

1. What is the projects average accounting rate of return (ARR)? 4 marks
2. How would you make the accept/reject decision using the ARR technique/ criterion? 2 marks
3. What is the payback period? 2 marks
4. How would you make the accept/ reject decision applying the payback period criterion? 2 marks

(Show all workings where applicable)

Formula:

=+cosPayback=yearbeforefullrecovery+unrecoveredcostatstartofyearcashflowduringtheyear

=ARR=averageincomeaverageinvestedcapital

==0(1+)