ACCA Applied Knowledge · Management Accounting · Asset budgeting and investment appraisal
A company is considering a machine costing 200,000 with no residual value. It is expected to generate an average annual accounting profit (after depreciation) of 30,000. What is the accounting rate of return (ARR) based on the average investment?
The ARR on average investment is 30%. Average investment is half the 200,000 cost, or 100,000, because there is no residual value. Dividing the average annual accounting profit of 30,000 by 100,000 gives 30%. Using the initial cost would give 15% instead.
- A15%
- B30%Correct
- C20%
- D60%
Explanation
With no residual value, average investment = 200,000 / 2 = 100,000. ARR = 30,000 / 100,000 = 30%. The 15% figure uses the initial investment as the base, which is a different version of ARR and not the one requested.
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