Paper 3 · June 2019 · Investment Appraisal
Project A has an initial outlay of $180 000 and an increase in working capital of $15 000. Its profits over its four-year life are $14 000, $10 000, $20 000 and $14 000. Using average annual profit divided by average investment (assuming a nil residual value), calculate the accounting rate of return (ARR), correct to two decimal places.
Model answer
14.87%
Also accepted: 14.87
Explanation
Total profit = $14 000 + $10 000 + $20 000 + $14 000 = $58 000, so average annual profit = $58 000 / 4 = $14 500. Total investment = $180 000 + $15 000 = $195 000, so average investment = $195 000 / 2 = $97 500. ARR = $14 500 / $97 500 x 100 = 14.87%.
Derived from ZIMSEC Accounting Paper 3, June 2019, Q4