Paper 3 · 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

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