Question

Q1: Which of the following is not claimed as an advantage of the accounting rate of return (ARR)?

a. .It facilitates ranking of projects of different sizes.

b. Accounting profit is a number familiar to most managers.

c. It is consistent with widely used measures of profitability.

Q2: A machine costs $100,000 and is expected to last four years, with a residual value of $10,000, Straight-line depreciation is used. The machine will earn a profit of $120,000 (before depreciation) over its life, equally each year. What is the machine's ARR? Round your percentage to the nearest integer.

A.55%

B.15%

C.14%

D.27%

Which of the following is NOT considered a weakness of the ARR method of evaluating investments?

a.The use of accounting profit

b.The use of average investment figures

c.Ease of calculation

d.The relative sizes of competing investments

Answer 1

Question 1.

Option C.It is consistent with widely used measures of profitability

The Results will be different if one uses ROI & other uses ARR. Creates a problem in decision making & thus no consistency with widely used measures of profitability

Question 2.

ARR = Average Annual Profit / Average Investment

Where:

• Average Annual Profit = Total profit over Investment Period / Number of Years
• Average Investment = (Book Value at Year 1 + Book Value at End of Useful Life) / 2

Average Annual Profit = 120000/4 = $ 30000

Average Investment = (100000+10000)/2 = 55000

ARR = 30000/55000 = 55%

OPtion A. 55% is the answer.

Question 3.

Option C. Ease of Calculation is a strength for ARR but not a weakness