Lender Limited is considering investing in a new project. It is estimated that it will cost £100,000 to implement, and that the expected net profit after tax will be as follows:

Question

Year	£
1	18000
2	47000
3	65000
4	65000
5	30000

No residual value is expected.

Required:
Calculate the accounting rate of return of the proposed project.

Accepted Answer

Lender Ltd’s accounting rate of return:

[latex]Accounting rate of return (APR)=\frac{average annual net profit after tax}{cost of investment} imes 100\%[/latex]

[latex]=\frac{\frac{1}{5}\left(£18000+ 47000+ 65000+ 65000+ 30000 ight) }{100000} imes 100\%[/latex]

[latex]=\frac{45000}{100000 } imes 100\%[/latex]

[latex]=45\%[/latex]

Note: Based on the average investment, the ARR

[latex]=\frac{£45000}{\frac{1}{2}\left(100000 ight)+ 0 } imes 100 \%[/latex]

[latex]=90\%[/latex]

Question 19.TQ.6 : Lender Limited is considering investing in a new project. It...

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