accounting rate of return arr example
TRANSCRIPT
Cost of Project – Scrap Value = Investment to be considered for depreciationCost of the project =500000Scrap Value =100000 Investment of project =400000No. of years =5years Depreciation =80000(Straigh line method of Depreciation = Investment / No. of years)
Now,Profit Before Depreciation & Tax (PBDT) - Depreciation = PBT
Years PBDT Depreciation Straight PBT
1st 100000 80000 20000
2nd 120000 80000 40000
3rd 140000 80000 60000
4th 160000 80000 80000
5th 200000 80000 120000
Profit Total 320000
Average Profit 64000
Accounting Rate of Return (ARR) = (Average Profit / Total Investment) x 100
ARR - 64000 x 100 /500000
ARR - 6400000 /500000
ARR - 12.8%
For Advantages & Disadvantages refer below given links;www.accountingformanagement.org/accounting-rate-of-return-method/
http://accountingexplained.com/managerial/capital-budgeting/arr
http://accountlearning.blogspot.in/2011/07/advantages-and-disadvantages-of.html
http://wiki.answers.com/Q/What_are_the_advantages_and_disadvantages_of_Average_Rate_of_Return
http://principlesofaccounting.blogspot.in/2009/06/accounting-rate-of-returnarr-method-of.html
Thanks & Regards
Mandar M Joshi
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