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ACCA FM · Guided practice (Show me how)

Chapter 7: Investment appraisal – methods

Accounting rate of return and payback

A machine will cost $80,000. It has an expected life of 4 years with an anticipated scrap value of $10,000. Expected net operating cash inflows each year are: year 1 $20,000; year 2 $30,000; year 3 $40,000; year 4 $10,000.

(a) Accounting rate of return. Calculate the accounting rate of return (ARR) of the project, where ARR = average profits p.a. from the investment / average book value of the investment x 100%.

(b) Payback periods. Calculate the payback period of the project, assuming cash is received evenly over each year.

  1. Accounting rate of return

    Calculate the machine's average annual accounting profit, average book value and accounting rate of return.

  2. Payback

    Calculate the machine's payback period.

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