Paper 3 · 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

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