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Mock Exam

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Mock Exam

  • This topic has 5 replies, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • June 18, 2014 at 3:41 pm #176999
    nguwah
    Member
    • Topics: 14
    • Replies: 9
    • ☆

    Able Ltd is considering a new project, for with the following information is available:

    Initial cost – $300,000
    Expected life – 5years
    Estimated scrap value – $20,000
    Addition revenue from the project – $120,000 per year
    Incremental costs of the project – $30,000 per year
    Cost of capital – 10%

    Calculate the Accounting Rate of Return of the project (to the nearest %)

    Dear Sir,

    Please help to explain above question.

    Thank you

    June 18, 2014 at 4:10 pm #177004
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    The extra cash flow is 90,000 per year.

    The average depreciation is (300,000 – 20,000) / 5 = 56,000 per year.

    So the average profit is 90,000 – 56,000 = 34,000 per year.

    The average investment is (300,0000 + 20,000) / 2 = 160,000.

    So the ARR = 56,000/160,000 = 21.25%

    (Have you watched my free lecture on investment appraisal?)

    June 19, 2014 at 3:44 pm #177230
    nguwah
    Member
    • Topics: 14
    • Replies: 9
    • ☆

    Dear Sir,

    I would like to know that why added 20,000(scrap value) in average investment

    The average investment is (300,0000 + 20,000) / 2 = 160,000.

    June 19, 2014 at 3:49 pm #177232
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    It is the average value in the Statement of financial position (balance sheet).

    If it cost 300,000 and had no scrap value, then the average value would be 300/2 = 150,000.

    Here is costs 300,000 and has a value at the end of 20,000. The average of the two is 300+20/2 = 160,000.

    (If you watch my lecture on investment appraisal then you will see I explain it there as well)

    June 19, 2014 at 3:51 pm #177233
    nguwah
    Member
    • Topics: 14
    • Replies: 9
    • ☆

    Noted!! Thank you, Sir.

    June 19, 2014 at 3:57 pm #177235
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are welcome 🙂

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