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Could you please explain how to calculate accounting rate of return for the following question.
initial cost = $300,000
expected life = 5 years
estimated scrap value = $20,000
additional revenue from the project per year = $120,000
incremental cost of the project = $30,000 per year
cost of capital = 10%The profit per year is 120,000 – 30,000 = 90,000, less depreciation of (300,000 – 20,000) / 5 = 56,000 per year. So the profit is 34,000 per year.
The average investment is (300,000 + 20,000) / 2 = 160,000
The ARR is the profit as a % or the average investment.
Have you watched my free lectures on this? The lectures are a complete free course and cover everything needed to be able to pass the exam well.
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