CA INTERMEDIATE: COSTING & FM · INVESTMENT DECISIONS

Accounting rate of return (ARR)

ARR = Average annual profit after depreciation and tax ÷ Investment × 100. Average investment = (Initial cost + Salvage value) ÷ 2.

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Worked examples

Example 1 · level 1

Sharma Industries Ltd: project cost ₹5,40,000, no salvage, life 3 years. Profits after depreciation and tax: ₹81,500, ₹82,000, ₹79,500. Find ARR on initial investment (%), two decimals.

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Average profit = ₹81,000.
Initial investment = ₹5,40,000.
ARR = 81,000 ÷ 5,40,000 × 100 = 15%.

Answer: 15 %

Example 2 · level 2

Iyer Foods Ltd: project cost ₹6,10,000, salvage value ₹20,000, life 3 years. Profits after depreciation and tax: ₹74,000, ₹73,500, ₹71,500. Find ARR on average investment (%), two decimals.

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Average profit = ₹73,000.
Average investment = (₹6,10,000 + ₹20,000) ÷ 2 = ₹3,15,000.
ARR = 73,000 ÷ 3,15,000 × 100 = 23.17%.

Answer: 23.17 %

Example 3 · level 3

Iyer Foods Ltd: project cost ₹5,90,000, salvage value ₹20,000, life 4 years. Profits after depreciation and tax: ₹1,19,000, ₹1,17,500, ₹1,19,000, ₹1,16,500. Find ARR on average investment (%), two decimals.

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Average profit = ₹1,18,000.
Average investment = (₹5,90,000 + ₹20,000) ÷ 2 = ₹3,05,000.
ARR = 1,18,000 ÷ 3,05,000 × 100 = 38.69%.

Answer: 38.69 %