Accounting Rate of Return

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

Question

Management decisions regarding the acquisition of non-current assets and other long-term investments involve huge capital outlay, and they are critical to the future profitability and success of the company.

Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

a. Appraise the project using the internal rate of return. (13 Marks)
b. Should the plant be purchased? (2 Marks)
c. State TWO advantages and THREE disadvantages of accounting rate of return (ARR) as an investment appraisal technique. (5 Marks)

(Total 20 Marks)

Answer

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Tags: Accounting Rate of Return, Capital Budgeting, Internal Rate of Return, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

Question

Baseline Limited plans to buy a machine costing N500 million which will last for four years and then be sold for N5 million. Additional working capital in the sum of N5 million will be required as soon as the project starts. Net cash flow before tax is expected to be as follows:

Period	Net Cash Flow (N millions)
Period 1	244
Period 2	286
Period 3	374
Period 4	156

Baseline Limited has a targeted Return on Capital Employed of 20%. Depreciation is charged on a straight-line basis over the life of an asset.

Required:

What is the Accounting Rate of Return (ARR) of this machine?

Answer

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Tags: Accounting Rate of Return, ARR Calculation, Capital Budgeting, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

Question

It is said that of all the capital investment evaluation approaches, the Payback (PB) and Accounting Rate of Return (ARR) methods are widely used in practice. But these methods are not without limitations.

Required:

i) State TWO justifications of Payback Period and ONE justification of ARR for their popularity in practice as investment appraisal techniques.
(3 marks)

ii) Outline TWO limitations each for Payback Period and ARR as investment appraisal techniques.
(4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Rate of Return, Capital Budgeting, Investment Appraisal Techniques, Payback Period
Level: Level 2

Topic: Decision making techniques, Discounted cash flow
Series: MAY 2016

FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal

Calculate and compare various investment appraisal metrics (ARR, NPV, IRR, Payback Period) for two mutually exclusive projects.

Question

ASANTA Ghana Ltd is considering investing in the following projects which are considered mutually exclusive:

	PROJECT GO	PROJECT COME
Annual cash inflows	GH¢1,000,000	GH¢2,000,000
Cost of Machine	GH¢2,500,000	GH¢6,000,000
Scrap value of Machine	GH¢250,000	GH¢1,000,000
Expected life of the Project	5 years	5 years

ASANTA Ghana Ltd uses the straight line method of depreciation. However, tax-allowable depreciation is 30% on a straight-line basis. The cost of capital for the company is 20% per annum.

Required:

Calculate the Accounting Rate of Return (ARR) for each project. (4 marks)
Calculate the Net Present Value (NPV) for each project. (4 marks)
Compute the Internal Rate of Return (IRR) for each project. (4 marks)
Compute the Payback period for each project. (3 marks)

(Note: In each of the above, advise the Company on which of the projects to implement or undertake.)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Rate of Return, Internal Rate of Return, Investment decisions, Net Present Value, Payback Period
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: MAY 2019

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

Question

Gboza Limited proposed to buy a plant costing N2,000,000 which is expected to generate annual net cash flow of N600,000 for six years at a cost of capital of 10%.

Required:

(Total 20 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Rate of Return, Capital Budgeting, Internal Rate of Return, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: NOV 2014

BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

Question

Period	Net Cash Flow (N millions)
Period 1	244
Period 2	286
Period 3	374
Period 4	156

Baseline Limited has a targeted Return on Capital Employed of 20%. Depreciation is charged on a straight-line basis over the life of an asset.

Required:

What is the Accounting Rate of Return (ARR) of this machine?

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Rate of Return, ARR Calculation, Capital Budgeting, Investment Appraisal
Level: Level 1

Topic: Investment Decisions
Series: MAY 2017

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

Question

Required:

i) State TWO justifications of Payback Period and ONE justification of ARR for their popularity in practice as investment appraisal techniques.
(3 marks)

ii) Outline TWO limitations each for Payback Period and ARR as investment appraisal techniques.
(4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Rate of Return, Capital Budgeting, Investment Appraisal Techniques, Payback Period
Level: Level 2

Topic: Decision making techniques, Discounted cash flow
Series: MAY 2016

FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal

Calculate and compare various investment appraisal metrics (ARR, NPV, IRR, Payback Period) for two mutually exclusive projects.

Question

ASANTA Ghana Ltd is considering investing in the following projects which are considered mutually exclusive:

	PROJECT GO	PROJECT COME
Annual cash inflows	GH¢1,000,000	GH¢2,000,000
Cost of Machine	GH¢2,500,000	GH¢6,000,000
Scrap value of Machine	GH¢250,000	GH¢1,000,000
Expected life of the Project	5 years	5 years

ASANTA Ghana Ltd uses the straight line method of depreciation. However, tax-allowable depreciation is 30% on a straight-line basis. The cost of capital for the company is 20% per annum.

Required:

Calculate the Accounting Rate of Return (ARR) for each project. (4 marks)
Calculate the Net Present Value (NPV) for each project. (4 marks)
Compute the Internal Rate of Return (IRR) for each project. (4 marks)
Compute the Payback period for each project. (3 marks)

(Note: In each of the above, advise the Company on which of the projects to implement or undertake.)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting Rate of Return, Internal Rate of Return, Investment decisions, Net Present Value, Payback Period
Level: Level 2

Topic: Introduction to Investment Appraisal
Series: MAY 2019

Question Tag: Accounting Rate of Return

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BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal

Calculate and compare various investment appraisal metrics (ARR, NPV, IRR, Payback Period) for two mutually exclusive projects.

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal

Calculate and compare various investment appraisal metrics (ARR, NPV, IRR, Payback Period) for two mutually exclusive projects.

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Question Tag: Accounting Rate of Return

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BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

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BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

You're reporting an error for "BMF – May 2017 – L1 – SB – Q6 – Investment Decisions"

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

You're reporting an error for "MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques"

FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal

Calculate and compare various investment appraisal metrics (ARR, NPV, IRR, Payback Period) for two mutually exclusive projects.

You're reporting an error for "FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal"

BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions

Appraise a proposed investment using the Internal Rate of Return and evaluate the use of the Accounting Rate of Return.

You're reporting an error for "BMF – Nov 2014 – L1 – SB – Q4 – Investment Decisions"

BMF – May 2017 – L1 – SB – Q6 – Investment Decisions

Calculation of ARR for a machine investment and evaluation of the advantages and disadvantages of IRR.

You're reporting an error for "BMF – May 2017 – L1 – SB – Q6 – Investment Decisions"

MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques

Discuss the justifications for the popularity and limitations of Payback Period and ARR as investment appraisal techniques.

You're reporting an error for "MA – May 2016 – L2 – Q2a – Discounted Cash Flow, Decision Making Techniques"

FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal

Calculate and compare various investment appraisal metrics (ARR, NPV, IRR, Payback Period) for two mutually exclusive projects.

You're reporting an error for "FM – MAY 2019 – L2 – Q3a – Introduction to Investment Appraisal"

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