1. Cost of Project – Scrap Value = Investment to be considered for depreciation
Cost of the project =500000
Scrap Value =100000
Investment of project =400000
No. of years =5years
Depreciation =80000
(Straigh line method of Depreciation = Investment / No. of years)
Now,
Profit Before Depreciation & Tax (PBDT) - Depreciation = PBT
Years PBDT Depreciation Straight PBT
1st
100000 80000 20000
2nd
120000 80000 40000
3rd
140000 80000 60000
4th
160000 80000 80000
5th
200000 80000 120000
Profit Total 320000
Average Profit 64000
Accounting Rate of Return (ARR) = (Average Profit / Total Investment) x 100
ARR - 64000 x 100 /500000
ARR - 6400000 /500000
ARR - 12.8%
For Advantages & Disadvantages refer below given links;
www.accountingformanagement.org/accounting-rate-of-return-method/
http://accountingexplained.com/managerial/capital-budgeting/arr
http://accountlearning.blogspot.in/2011/07/advantages-and-disadvantages-of.html
http://wiki.answers.com/Q/What_are_the_advantages_and_disadvantages_of_Average_Rate_of_Return
http://principlesofaccounting.blogspot.in/2009/06/accounting-rate-of-returnarr-method-of.html
Thanks & Regards
Mandar M Joshi
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