accounting rate of return arr example
DESCRIPTION
Accounting Rate of Return ARR example. Advantages of considering ARR ratio for new Investments.TRANSCRIPT
Question :- A project costs Rs.5,00,000 and has a scrap value of Rs. 1,00,000. Its stream of income before depreciation and taxes during first year through five years is Rs. 1,00,000, Rs.1,20,000, Rs. 1,40,000, Rs. 1,60,000 and Rs. 2,00,000. Assume a 50 per cent tax rate and depreciation on straight-line basis. Calculate the accounting rate for the project. Also explain the advantages and disadvantages of ARR.
Answer:-
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