What is the accounting rate of return on the investment project?

Question

The Management of the Pizza Delivery wants to install new Pizza Machine in its restaurant, whose details are as follows.

1.Cost Rs140,000 and has a10-year life.

2.Will generate incremental revenues of Rs100,000 and incremental expenses of Rs65,000, including depreciation.

Muhammad Qureshi · Answer

Again i will ask finance professionals to give feed back to take action on new installation

Muhammad Salman Jahanzeb · Answer

Assuming all factors remain constant over a10 year period and the scrap value is0.

Calculations can be done using two methods.

Formula1:

ARR=Average profits/ initial investment

ARR=(100,000 -65,000)/140,000 =35,000/140,000 =0.25 or25 %

Formula2:

ARR= Average profits/ Average investment

ARR=35000/((140,000 +0) /2) =0.5or50%