ACCA FM · Chapter 6 · Question 2 of 10
A machine costs $500k and will be sold for $50k at the end of its 5-year life. Total net cash inflows over the 5 years are expected to be $800k. Depreciation is on a straight-line basis. What is the accounting rate of return (ARR) based on average investment?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 25.5%
Explanation
Total depreciation = 500 - 50 = 450, so total profit = 800 - 450 = 350 and average annual profit = 350 / 5 = 70. Average investment = (500 + 50) / 2 = 275. ARR = 70 / 275 = 25.5% (1 decimal place). Using the initial investment gives 14.0%, and using cash flows instead of profit gives 58.2%.
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