ICAEW BIP · Chapter 13 · Question 2 of 9
A machine costs £240,000 and will be sold for £40,000 at the end of its 5-year life. Total net cash inflows from the machine over the 5 years are expected to be £360,000. Depreciation is charged on a straight-line basis. What is the accounting rate of return based on average investment (to one decimal place)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 22.9%
Explanation
Total profit = net cash inflows £360,000 - total depreciation (£240,000 - £40,000) £200,000 = £160,000. Average annual profit = £160,000 / 5 = £32,000. Average investment = (£240,000 + £40,000) / 2 = £140,000. ARR = £32,000 / £140,000 = 22.9%.
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