CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control
Ganga Polymers is considering a project costing Rs 10,00,000 with a 5-year life and no salvage value, depreciated on a straight-line basis. Annual profit after depreciation and tax is Rs 1,20,000. What is the accounting rate of return on average investment?
The accounting rate of return on average investment is 24%. With no salvage value, average investment is half of Rs 10,00,000, or Rs 5,00,000, and Rs 1,20,000 of average annual profit divided by this gives 24%. Using the full outlay would wrongly give 12%.
- A12%
- B24%Correct
- C20%
- D48%
Explanation
Average investment = 10,00,000/2 = 5,00,000 (no salvage). ARR = 1,20,000/5,00,000 = 24%. Using the initial investment gives 12%, which is the wrong base.
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