IRR

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January 21, 2017 at 3:39 pm #368729
geokcheng
Member
- Topics: 17
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Sir,

Can show me how to calculate question 1(b) section b mock exam? Undestand that IRR is try an error, but i couldn’t get the same answer.

YR
0 Cost (300,000)
1-5 inflow 90,000
5 Scrap value 20,000

Dis. factor 17%
Year 1-5 is 3.199
Year 5 – 0.456
PV:
(300,000)
287,910
9,120
______
(2970)

Dis. factor 16% for:
Year 1-5 is 3.274
year 5 scarp value is 0.476
PV
(300,000)
294,660
9520
______
4180

IRR = 16%+(4180/(4180+2970)*(17-16)% =16.58%

But the answer is 21. Please correct me which part went wrong.
January 21, 2017 at 4:06 pm #368736
John Moffat
Keymaster
- Topics: 57
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But the question does not ask you for the IRR !!!!

It asks for the Accounting Rate of Return, which is the average profit per year after depreciation (34,000) as a % of the average investment (160,000).
January 21, 2017 at 5:11 pm #368756
geokcheng
Member
- Topics: 17
- Replies: 12
sir,

Is this ARR is included in F2 syllabus? I can’t find this topic. Can you explain how to get 34,000 & 160,000?
January 22, 2017 at 7:48 am #368825
John Moffat
Keymaster
- Topics: 57
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The profit before depreciation = 90,000 per year
The depreciation = (300,000 – 20,000)/5 = 56,000 per year.
So the profit = 90,000 – 56,000 = 34,000

The average investment = (300,000 + 20,000) / 2 = 160,000
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