CA Inter P6 · Chapter 7 · Question 5 of 10
Equipment costs ₹ 6,00,000, has a 5-year life and a salvage value of ₹ 1,00,000. The average annual profit after depreciation and tax is ₹ 45,000. The accounting rate of return on average investment is:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 12.86%
Explanation
Average investment = (initial cost + salvage) / 2 = (6,00,000 + 1,00,000) / 2 = ₹ 3,50,000. ARR = 45,000 / ₹ 3,50,000 = 12.86%. Ignoring salvage gives an average investment of ₹ 3,00,000 and 15%. ARR on the initial investment of ₹ 6,00,000 gives 7.50%.
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