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When calculating ARR by using average investment, which is initial investment plus disposal value, then divide by 2.
My question is why plus disposal value, not minus?
Is it because it is profit??We need to calculate what the average value on the SOFP will be.
If there was no disposal value then the average would simply be the original cost divided by 2. If however there is a disposal value, then it still has a value immediately before it is sold and so the average value will be higher – the average of the two values.
I do explain this in my free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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