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equipment cost = 1800000 with a 9 year life
Revenue= 90000 per year
incremental cash operating expenses= 40000 per year
no salvage value projected
Calculate ARRPlease do not simply type out a question and tell me to provide an answer.
You must have an answer in the same book in which you found the question, and so ask about whatever it is in the answer that you are not clear about – then I will explain.
Everything needed to be able to answer this question is explained in my free lectures.
There are no workings for this question because i didn’t find it in any other book. I found it on another website. I subtract the revenue from operating costs and that gives me net cash flow of 50000. i calculate the avg investment as 180000/2= 90000. Arr: 50000/90000= 55% But the answer is 33%. There are no workings provided. Sorry for the simple question above. : )
You have not subtracted depreciation. ARR is an accounts based measure and we use the average profit per year.
The average depreciation is 180,000/9 = 20,000 per year.
Therefore the profit is 30,000 per year and the ARR is 33.3% 🙂
Ohh ! Now i get it. Thanks a lot for the help and i apologise again for my “simplicity”. 🙂
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