Paper 3 · June 2019 · Investment Appraisal
Project B has an initial outlay of $160 000 and an increase in working capital of $6 000. Its profits over its four-year life are $13 000, $9 800, $17 000 and $16 200. 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
16.87%
Also accepted: 16.87
Explanation
Total profit = $13 000 + $9 800 + $17 000 + $16 200 = $56 000, so average annual profit = $56 000 / 4 = $14 000. Total investment = $160 000 + $6 000 = $166 000, so average investment = $166 000 / 2 = $83 000. ARR = $14 000 / $83 000 x 100 = 16.87%.
Derived from ZIMSEC Accounting Paper 3, June 2019, Q4