A project has the following net profit after tax set out below. The average book value of the assets in the project is 110,092. What is the accounting rate of return of this project? Enter your final answer in decimals to four decimal places (e.g., if your answer is 5.55%, then enter 0.0555). Year Net Profit After Tax 1 5,963 2 7,772 3 8,523 4 10,145
Question
A project has the following net profit after tax set out below. The average book value of the assets in the project is 110,092. What is the accounting rate of return of this project? Enter your final answer in decimals to four decimal places (e.g., if your answer is 5.55%, then enter 0.0555).
Year
Net Profit After Tax
1
5,963
2
7,772
3
8,523
4
10,145
Solution
The Accounting Rate of Return (ARR) is calculated by taking the average net profit and dividing it by the average investment.
Here's how you can calculate it:
Step 1: Calculate the total net profit after tax over the project's life.
Net Profit After Tax for Year 1 = 5,963 Net Profit After Tax for Year 2 = 7,772 Net Profit After Tax for Year 3 = 8,523 Net Profit After Tax for Year 4 = 10,145
Total Net Profit After Tax = 5,963 + 7,772 + 8,523 + 10,145 = 32,403
Step 2: Calculate the average net profit after tax.
Average Net Profit After Tax = Total Net Profit After Tax / Number of Years Average Net Profit After Tax = 32,403 / 4 = 8,100.75
Step 3: Calculate the average book value of the assets in the project.
The average book value of the assets in the project is given as 110,092.
Step 4: Calculate the Accounting Rate of Return (ARR).
ARR = Average Net Profit After Tax / Average Book Value of Assets ARR = 8,100.75 / 110,092 = 0.0736
So, the Accounting Rate of Return (ARR) of this project is 0.0736 or 7.36% when expressed as a percentage.
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