Question

Q.8 (a) Using the information contained in the table below, calculate the accounting rate of return(ARR),...

Q.8 (a) Using the information contained in the table below, calculate the accounting rate of return(ARR), showing all your working for both projects:

Year

Project A

Project B

(100)

(100)

0

20

35

1

25

35

2

35

30

3

25

15

4

25

10

5

25

10

6

10

-

(b)Explain the advantages and disadvantages of the accounting rate of return(ARR).[ 20 marks

Homework Answers

Answer #1
Project A Project A
Initial Investment 100 100
Total Inflow 165 135
Yr 6 5
Average Annual Inflow 27.5 27
Accounting Rate Of Return =B7/C4 =B7/C4
27.50% 27.00%
Advanatges
1 It considers net operating income for calculation of rate , which is generally analysed by the investors
2 The method makes it easier to understand and calculate the period of payback
3 The method is extremely helpful when trying to measure the present performance of a firm.
Disadvantages
1 It Ignores time value of money
2 It doesnot takes into consideration all the cash inflows
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