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CS Executive · Corporate Accounting and Financial Management · Capital Budgeting

Anand Ltd. invests Rs 5,00,000 in a project with nil scrap value. Average annual accounting profit after depreciation and tax is Rs 75,000. What is the ARR on the initial investment?

The ARR on initial investment is 15 percent. Dividing the average annual profit after tax of Rs 75,000 by the initial investment of Rs 5,00,000 gives 0.15. Using average investment would double it to 30 percent, which is a different base.

  1. A10%
  2. B15%Correct
  3. C20%
  4. D30%

Explanation

ARR on initial investment = average annual profit / initial investment = 75,000/5,00,000 = 15%. The 30% figure results from using average investment of 2,50,000 instead, which is a different base.

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