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Accounting rate of Return.

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Accounting rate of Return.

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • April 17, 2022 at 7:58 pm #653512
    sarbrina
    Participant
    • Topics: 57
    • Replies: 78
    • ☆☆

    Hi Mr. Maffot,

    This is the first question about ARR i have come across and i unfortunately do not know how to answer this question. I have tried numerous formulas yet i cannot seem to arrive at the answer. Can you please let me know the formula and also please explain the answer to me.

    Able Ltd is considering a new project, the details of which are attached.

    b) Calculate the Accounting Rate of Return of the project (to the nearest %).

    Information:
    Initial cost – $300,000
    Expected life – 5 years
    Estimated scrap value – $20,000
    Addition revenue from the project – $120,000 per year
    Incremental costs of the project • $30,000 per year

    Cost of capital – 10%

    April 18, 2022 at 10:19 am #653724
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54664
    • ☆☆☆☆☆

    The total profit before depreciation over the 5 years is 5 x (120,000 – 30,000) = 450,000.
    The total depreciation over the 5 years is 300,000 – 20,000 = 280,000.
    Therefore the total accounting profit is 450,000 – 280,000 = 170,000, and the average annual profit is 170,000/5 = 34,000 per year.

    The average amount invested is (300,000 + 20,000) / 2 = 160,000.

    Therefore the ARR is 34,000 / 160,000 = 21.25%

    April 18, 2022 at 1:07 pm #653776
    sarbrina
    Participant
    • Topics: 57
    • Replies: 78
    • ☆☆

    Thank you so much Mr. Maffot.

    April 19, 2022 at 8:28 am #653867
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54664
    • ☆☆☆☆☆

    You are welcome.

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Accounting rate of Return.’ is closed to new replies.

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