Question
The project is requiring an investment of 40000 and is
depreciated on a SLM basis and the Cash Inflows of the project are the following, what is the ARR? Year Cash flows 1 6000 2 9000 3 7000 4 8000 5 10000Solution
In this case we need to convert Cash flows to profits like the following: Profits = Cash inflows + depreciation. Here depreciation is (40000/5) = 8000. So, average profits = 16000 and the average investment = 20000. ARR= Average profits/ Average investment. Therefore, ARR = 16000/20000 = 80%
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