A project has an accounting rate of return of 20%. The assets used in the project have an original cost of £500,000 and an expected resale value of £50,000 when the project comes to an end in 5 years' time. What are the total cash inflows expected from this project?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is calculated as the average annual profit divided by the initial investment. Here, ARR is 20%, and the initial investment is £500,000. Therefore, the average annual profit is 20% of £500,000, which is £100,000. Over 5 years, the total profit is £100,000 * 5 = £500,000. Adding the resale value of £50,000 gives total cash inflows of £500,000 + £50,000 = £550,000. However, the question asks for total cash inflows, which includes the initial investment, so £500,000 (initial investment) + £500,000 (total profit) + £50,000 (resale value) = £1,050,000. But since the question seems to imply only the inflows excluding the initial investment, the correct choice is £725,000 (total profit + resale value).

A Project Has an Accounting Rate of Return of 20