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according to Finance books,accounting rate of return=average profit/average investment
average investment=(initial cost +residual value)/2
Here,i have some blur points.If you make it clear i will be happy.
For instance,Assume that company invests 5000 and 1000 working capital in year0 for 5 years projects,after 2 years it invests again 2000 as working capital.Furthermore,average profit is 1500 then what is ROCE(Accounting rate of return)?
My blur point is to what is average ivestment?
Because we assume that the working capital is recovered at the end of the projects life, it is not relevant for the calculation of the average investment.
Therefore the average investment in this question (assuming no residual value) is 5,000/2 = 2,500.
I think so.But according to Kaplan F9,initial capital cost:
The initial capital cost could comprise any or all of the following:
• cost of new assets bought
• net book value (NBV) of existing assets to be used in the project
• investment in working capital
• capitalised R&D expenditure (NB ensure this is amortised against profit)Here i am a bit confused about it.
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