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ARR uses accounting profit and hence depreciation should be used. This question is really an eye-opener for me. The examiner just throws in so much stuff to look out for. The calculation of depreciation ($14million – residual value $2million)/ 4 years = $3million per annum. I suppose we can make an assumption that production will only be effective from year 1 – that is a good question. The capital employed to be used was as per the specifications of the requirements in the question – please clarify on how you calculated the 585 amount because the detailed workings for profit will not work to be this amount. The calculation of current capital employed of (75 +25) is a good one – I surely could have missed that ( but the question said to ignore receivables and payables, if we had considered these two variables then the capital employed should have been 88. This is a fantastic question.