How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

Question

Quizplus · Accepted Answer

Depreciation reduces the amount of earnings available for a project, so it should be deducted from the annual cash inflows when calculating the accounting rate of return (ARR). This is because ARR is a measure of profitability, and depreciation is a non-cash expense that does not represent actual cash inflows. By deducting depreciation from the cash inflows, the ARR calculation will provide a more accurate measure of the project's profitability.

How Does Depreciation Affect the Calculation of a Project's Accounting