Question

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

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