Concept introduction:
Accounting
To calculate:
Accounting rate of return.
Answer to Problem 3.1GBP
Project 1: ARR=25 %
Project 2: ARR=20.12 %
Project3: ARR=13 %
It is better to accept project 1.
Explanation of Solution
Accounting rate of return for each project is calculated as follows:
Project-1:
Accounting rate of return = Average net Income* 100/ Initial Outflow
= (975000 - (2700000-600000)/7) *100/ 2700000
= (975000 - 300000)* 100/ 2700000
= 25%
Average Net Income =
Depreciation = 2700000-600000)/7 = 300000
Project-2:
Project-3:
As per accounting rate of return, it is better to accept project 1 because it has the highest ARR.
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Chapter 11 Solutions
Managerial Accounting
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