accounting rate of return — OpenTuition Forums

Ddensdumbo113y ago

when we are asked to calculate the arr...we have to calculate the avg annual post depreciation profit ..before we use the formula...i have a doubt...if the cashflows for 5 years r given ...suppose 100+400+450+550+200...and d cost of the asset is 1000 with a srap value of 200...while calculating the avg annual post dep prft....we (add all cashflows n then subtract the depreciation ...(.cost - scrap)/5) n then the answer we get is the avg annual post dep prft ....but in some sums....while subtracting the depreciation...they do not divide it with the no. of years.....they divide it after TOTAL CASHFLOWS--(COST-SCRAP)=ANSWER...N THEN DIVIDE THE ANSWER WITH THE no. of years...which one is right.... {1700-800}/5 or {1700-(1000-200)/5 } why is it like that ?....pls help

John MoffatTutor13y ago#1

To get the average profit, you can either take the total cash minus the total depreciation, and then divide by 5. Alternatively, you can take the average cash per year and subtract the average depreciation per year. They would give the same answer. The first is more sensible (total cash minus total depreciation, then divide by 5) because it is quicker! The last 'equation' in your message, {1700-(1000-200)/5 } makes no sense at all - calculating the total cash for 5 years and then subtracting one years depreciation means nothing at all. We are after the average profit per year!

Ddensdumbo113y ago#2

and what if they give cost of asset =110000 an annual cash flow for 5 years= 24400... scrap value = 10000 in 5yrs depreciation to be charged on straight line basis.... in this case if i calculate (total cash - total depreciation ) n then divide by 5 years....{24400-(110000-10000)}/5yrs...how can i calculate d avg annual post dep prft ...il get a negative value...which makes no sense at all..? what do i do in this case ?

John MoffatTutor13y ago#3

I really cannot understand why you are doing what you are doing!!!! The total cash flow is 5 x 24400 = 122,000. Think about it - this is the total profit before depreciation over the 5 year. The total depreciation over the 5 years is 110,000 - 10,000 = 100,000. So the total profit over 5 years is 122,000 - 100,000 = 22,000. So the average profit per year is 22,000 / 5 = 4,400. Read my previous reply more carefully, and think about what you are doing - don't just try and learn rules!

Ddensdumbo113y ago#4

.i normally use ur method only...but i misunderstood d question....now i got it...thanks a lot sir :)

John MoffatTutor13y ago#5

You are welcome :-)