VCV Limited is investing £500,000 into a new project. The project will last for five years. At the end of the five years, the project assets will be sold for £200,000. Depreciation on project assets is provided on the straight line basis over five years. The expected net cash inflows from the project in years 1 to 5 are expected to be £50,000, £100,000, £150,000, £200,000 and £250,000. What is the accounting rate of return for this project?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. The average annual profit is the total net cash inflows minus depreciation, divided by the number of years. Depreciation is (£500,000 - £200,000) / 5 = £60,000 per year. Total net cash inflows over 5 years = £750,000. Average annual profit = (£750,000 - £300,000) / 5 = £90,000. ARR = (£90,000 / £500,000) * 100 = 18%. However, the correct choice based on the given options is closest to 25.71%, which may involve a different interpretation or calculation method.

VCV Limited Is Investing £500,000 into a New Project