ARR
Formula Example
Saleem Khan & Company
installed a plant costing $ 2000. Disposal proceed expected from the plant at
the end of project is of machine at end of project was $ 600. Expectations of
cash inflow from the project is as under
|
1
|
$ 800
|
|
2
|
$ 600
|
|
3
|
$ 400
|
|
4
|
$ 200
|
|
5
|
$ 200
|
Solution
ARR
Formula
= Average
profit/Average Investment
Profit may be calculated from
the cash flow by deducting the depreciation. Therefore we will first calculate
the depreciation and then we will deduct that depreciation from the total cash
flow to calculate the profit.
1. Depreciation Calculation
Depreciation
=Cost of Plant –Disposal Value
Depreciation
=$ 2,000- $ 600= $ 1,400
2. Calculate Profit & Average Profit
Total
Cash flow –Deprecation
=
2,200$ –$ 1,400
=
$ 600 (Total Profit)
=
$ 600/ 5 Years
=$
120 (average Profit)
3. Average Investment
Highest
Investment = $ 2,000
Lowest
Investment (Disposal value) = $ 600
Total
investment = $ 2,000 + $ 600 = $ 2,600
Average
Investment = $ 2600/2 = $ 1,300
4. Accounting Rate of Return
Average
profit /Average Investment
=
120/1,300 x 100
=9.2%
