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I tried to take ACCA F2 Mock exam in your web and had difficulties with question 32 ‘required to calculate accounting rate of return’ (I calculated IRR which is 17% and of course it was incorrect). Could please advice how ARR might be calculated. Thanks
The ARR is calculated as the average profit per year as a % of the average capital invested (the initial cost plus the scrap proceeds, divided by 2).
In the mentioned question the average profit per year $90,000, the capital invested plus the scrap $320,000, correct? The correct answer 21%, how it was found ? 🙁
Firstly, the profit is not 90,000 per year. That is the net cash flow, and so to get the profit you need to subtract depreciation of (300,000 – 20,000)/ 5 = 56,000 per year.
So the profit is 90,000 – 56,000 = 34,000 per year.Secondly, the average capital employed is not 320,000. As I wrote before, it is (300,000 + 20,000) / 2 = 160,000.
ARR = 34,000 / 160,000 = 21.25%
Thank you John, now i know my gaps, and your comments are really very helpful.
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