Question
There is a project which involves purchase of a
machinery that costs Rs.50,000, which has useful life of 3 years, after which it has a scrap value of Rs.10,000. The Machine gives annual profit as shown on the following timeline: What is the Accounting Rate of return of the project in question?Solution
ARR = (Average Annual Profit)/ (Average Investment) Average Investment is (50000+10000)/2 = 30000 and Average Profits = (5000+2000+2000)/3 = 3000 Therefore, ARR = 10% · Higher the ARR, better it is. · If the project’s ARR is equal or higher to the target ARR of the organisation, accept the project.
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