Accounting Rate of Return – ACCA Financial Management (FM)
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You are the best John.
Thank you 馃檪
Thank you very much sir.
I am also inquiring, when do we discount the cashflows to present values when calculating for the payback period. Because in the example it seems we aren’t putting the value of money into consideration?
If a question simply asks for the payback period then we do not discount the flows.
If it asks for the discounted payback period then we discount the flows first (as stated in our lectures notes, and as we did for Paper MA).
Hi Sir,
thanks for lectures , quick question for ARR and payback method do we need to use discount factor ?.
Thanks in advance
Not for ARR. We need to discount if we are calculating the discounted payback period.
Dear sir. If we have working capital in ARR question, how are we going to compute the average book value? Say we have 10,000 at the start of the project and release it at the end of the project. Thank you so much.
It will be ignored because it will effectively have been turned back into cash as opposed to being tied up in inventory etc..
Thank you for this lecture. If I may ask, why is the scrap vale of $10,000 not included as part of the total cash flow of $100,000 in calculating the total profit p.a.?
The scrap value is never a profit in financial accounting, and this is an accounting measure.
Thanks for the clarification
You are welcome 馃檪
ARR and Average Investment Method Same Thing? If not Please tell Me What is difference between Them?
They are the same thing.
For ARR and payback period,
Could we use the formula like
Cash inflow= profit + depreciation
By the way , I thought to ask this question in Ask to Tutor, but I couldn’t find it for FM.
ARR is calculated using the average profit, payback period is calculated using cash flows (which are the profits before depreciation).
There is an Ask the Tutor Forum for Paper FM. Click on the ‘forums’ tab and you will see it on the list!
In example 8, the net operating cash inflow is just a simple cash flow or it is net operating profit ?
Because for operating profit, we should not do depreciation.
Cash flow means what it says – cash! That is not the same as the profit.
Is ARR and ROCE is same?
ARR is calculated as a way of appraising an investment, and use the average expected profit.
ROCE is calculated for a company as a whole and is calculated at the end of each year (think back to Paper FA (was F3) or whatever exempted you from it).
Hi John,
I didn’t get the point of average book value.
Book value formula = cost – depreciation
=80,000-17,500
=62,500 p.a
If I divide 62,500 by 2 in order to compute average of book value so the answer will be 31,250.
Just clear my concept through this process of average book value.
Thanks.
To get the average during the year you add together the values at the start and end of the year, and then divide by 2.
got the point.
Thanks John.
You are welcome 馃檪
Am cool with these approaches. Thank you sir
Thank you for your comment 馃檪
Hi John, the average profit divided over 4 while average book value divided only over 2.
shouldn’t be also over the useful life of the asset ?
Thanks
No. The average book value of the asset is the average of the value at the start and the value at the end – we add them together and divide by 2.
Do watch the lecture again, because I do explain the reasoning.
To calculate an average of two numbers, you add them together and divide by 2.
If the scrap value had been zero, then the average value would have been 80,000/2 = 40,000.
The value at the end is more than zero, and so the average value is higher than 40,000.
Thank you!
Hi sir,
Sorry but I don’t understand the portion related to the average book value in example 8.
If the machine costs $80 000 and $10 000 scrap value. Why do you minus the $10 000? In the example you had added on the $10 000. I’m a little confused on that portion.
Thank you in advance for your help!
10000+(80000-10000)/2=45000