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Able co ltd is considering a new project for which the following information is available
Initial cost :$300000
Expected life 5 years
Estimated scrap value $20000
Additional revenue from the project : $120000 per year
Incremental costs of the project $30000 per year
Cost of capital 10%Calculate the accounting rate of return
The average annual profit before depreciation = 120,000 – 30,000 = 90,000
The depreciation per year = (300,000 – 20,000)/5 = 56,000
Therefore average profit after depreciation = 90,000 – 56,000 = 34,000Average investment = (300,000 + 20,000) / 2 = 160,000
ARR = 34,000/160,000 = 21.25%
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