Question

A project costs Rs 1,00,000 and has a scrap value of Rs 20,000. Its stream of income before depreciation and taxes during the first year through five years is Rs 20,000, Rs 24,000, Rs 28,000, Rs 32,000 and Rs 40,000. Assume a 50% tax and depreciation on a straight-line basis. Calculate the accounting rate for the project.​

Answer 1

Answer:

Average Investments = original investments - scrap value / 2      

                                                                                                                                                                                                   = 100000-20000 / 2 = 40000      

                                                                                                                                                                                                                                                                                                 

• Average annual profits after depreciation and taxes = Rs. 6400                                                                                                                                                                                                                            

• Accounting Rate of return = Average annual profits - Depreciation and Taxes / Average Investment x 100                                                                                                      

Accounting rate of return = 6400/40000x100 =  16%          

 

Explanation:

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