cent, take B if the required return is between 5.42 percent and 38.54 percent (the IRR on B), and take neither if the required return is more than 38.54 percent.

9.3 Here we need to calculate the ratio of average net income to average book value to get the AAR. Average net income is:

Average net income = ($2,000 + 4,000 + 6,000)/3 = $4,000

Average book value is:

So the average accounting return is:

This is an impressive return. Remember, however, that it isn't really a rate of return like an interest rate or an IRR, so the size doesn't tell us a lot. In particular, our money is probably not going to grow at a rate of 66.67 percent per year, sorry to say.

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