Question 4.2: George put forward an investment proposal to his boss. The b...

The ARR of the project will be:

$ARR =\frac{£48,000 − £16,000}{(£200,000 + £40,000)/2} \times 100\%=26.7\%$

The boss rejected George’s proposal because it failed to achieve an ARR of at least 27 per cent. Although George was disappointed, he realised that there was still hope.

In fact, all the business had to do was to give away the piece of equipment at the end of its useful life rather than sell it. The residual value of the equipment then became zero and the annual depreciation charge became ((£200,000 – £0)/10) = £20,000 a year. The revised ARR calculation was then as follows:

$ARR =\frac{£48,000 − £20,000}{(£200,000 + 0)/2} \times 100\%=28\%$