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23.24%

To compute the book value of equity in each year, we first compute the book value of the fixed assets (plant and equipment), add to it the book value of the working capital in that year and subtract out the outstanding debt. The return on equity each year is obtained by dividing the net income in that year by the average book value of equity invested in the plant in that year. The increase in the return on equity over time occurs because the net income rises, while the book value of equity decreases. The average real return on equity of 22.91% on the paper plant project is compared to the real cost of equity for this plant, which is 11.40%, suggesting that this is a good investment.

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