JVG Limited is planning a new project. The project will generate accounting profits of £380,000 over its five year life. The accounting rate of return of this project is 16%. What is the average capital employed by this project?

Question

Quizplus · Accepted Answer

The Accounting Rate of Return (ARR) is calculated as the average annual profit divided by the average investment. Given an ARR of 16% and annual profits of £380,000, we can rearrange the formula to solve for the average investment: Average Investment = Average Annual Profit / ARR = £380,000 / 0.16 = £2,375,000. However, since the £380,000 profit is over the entire project life of 5 years, the correct calculation should be: Average Annual Profit = Total Profit / Project Life = £380,000 / 5 = £76,000. Then, Average Investment = £76,000 / 0.16 = £475,000.

JVG Limited Is Planning a New Project