Using the information in the table below,calculate the ARR.
$\begin{array}{|l|r|}
\hline\text { Expected net cash flows: } \
\text { - Year 1 } & \$ 60000 \
\hline\text { - Year 2 }& \$ 70000 \
\hline \text {- Year 3 }& \$ 120000 \
\hline\text { - Year 4 }&\$ 90000 \
\hline\text { - Year 5 }& \$ 80000 \
\hline \text {Annual depreciation }& \$ 12000 \
\hline \text {Period of investment} & \text {5 years} \
\hline \text {Initial investment} & \$ 600000 \
\hline \text {Value at end of the investment period }& \$ 50000 \
\hline
\end{array}$

Question

Using the information in the table below,calculate the ARR.
$\begin{array}{|l|r|}
\hline\text { Expected net cash flows: } \
\text { - Year 1 } & \$ 60000 \
\hline\text { - Year 2 }&  \$ 70000 \
\hline \text {- Year 3 }& \$ 120000 \
\hline\text { - Year 4 }&\$ 90000 \
\hline\text { - Year 5 }& \$ 80000  \
\hline \text {Annual depreciation }&  \$ 12000  \
\hline \text {Period of investment} & \text {5 years} \
\hline \text {Initial investment} & \$ 600000  \
\hline \text {Value at end of the investment period }& \$ 50000  \
\hline
\end{array}$

Quizplus · Accepted Answer

The ARR (Accounting Rate of Return) is calculated as the average annual profit divided by the initial investment. First, calculate the total net cash flow over 5 years: $60,000 + $70,000 + $120,000 + $90,000 + $80,000 = $420,000. Subtract the total depreciation over 5 years ($12,000 * 5 = $60,000) from the total cash flow to get the total profit: $420,000 - $60,000 = $360,000. The average annual profit is $360,000 / 5 = $72,000. The ARR is then ($72,000 / $600,000) * 100 = 12%. However, considering the salvage value, the correct calculation involves adjusting for the net investment, leading to an ARR of approximately 22.15%.

Using the Information in the Table Below,calculate the ARR A) 3055% B) 22

Using the Information in the Table Below,calculate the ARR A) 3055%
B) 22