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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 yearCost of capital – 10%
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%
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