CS Professional · Strategic Management and Corporate Finance · Project Evaluation
A firm invests Rs 8,00,000 in a project with a life of 5 years and zero salvage value. Total net profit after depreciation over the 5 years is Rs 4,00,000. Accounting rate of return on average investment is:
ARR on average investment is 20%. Average annual profit is Rs 80,000 (Rs 4,00,000 over five years), and average investment is Rs 4,00,000 (half of cost, as salvage is zero), so 80,000 divided by 4,00,000 equals 20%.
- A10%
- B20%Correct
- C12.5%
- D25%
Explanation
Average annual profit = 4,00,000/5 = 80,000. Average investment = (8,00,000 + 0)/2 = 4,00,000. ARR = 80,000/4,00,000 = 20%. Using the initial investment as base gives 10%, which is the wrong base here.
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