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Hey Sir,
I am having an issue figuring how how the Annual Rate of Return was calculated for the Able Limited question. Can you please explain, thank you.
The net cash inflow per year is 120,000 – 30,000 = 90,000.
The depreciation per year = (300,000 – 20,000)/5 = 56,000
Therefore the profit per year = 90,000 – 56,000 = $34,000.The average investment over the period is (300,000 + 20,000) / 2 = $160,000.
Therefore the ARR = 34,000/160,000 = 21% (to the nearest %)
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