The accounting rate of return method Bridge Limited is considering investing in a new project, the details of which are as follows:

Question

The accounting rate of return method

Bridge Limited is considering investing in a new project, the details of which are as follows:

Project life	5 years
	£000	£000
project cost		50
Estimated net profit:
Year 1	12
2	18
3	30
4	25
5	[latex]\underline{5} [/latex]
Total net profit	[latex]\underline{\underline{90} }[/latex]

The estimated residual value of the project at the end of Year 5 is £10,000.

Required:
Calculate the accounting rate of return of the proposed new project using:
(a) the original capital employed
(b) the average capital employed.

Accepted Answer

The accounting rate of return would be calculated as follows:

(a) Using the initial capital employed:

[latex]\frac{Average annual net profits}{Cost of the investment} imes 100[/latex]

Average annual net profits = £18 000 (£90 000/5)

∴ Accounting rate of return [latex]= \frac{£18 000}{50 000} imes 100=\underline{36\%}[/latex]

(b) Using the average capital employed:

[latex]\frac{Average annual net profits}{Average capital employed} imes 100[/latex]

[latex] =\frac{£18 000}{\frac{1}{2} \left(£50 000+ 10 000 ight) } imes 100 =\underline{60\%}[/latex]

Question 19.3: The accounting rate of return method Bridge Limited is consi...

Related Answered Questions

The internal rate of return method Bruce Limited is considering whether to invest £50,000 in a new project. The project’s expected net cash flows would be as follows: ...

Verified Answer:

The net present value method Rage Limited is considering two capital investment projects. The details are outlined as follows: ...

Verified Answer:

The discounted payback method Newland City Council has investigated the possibility of investing in a new project, and the following information has been obtained: ...

Verified Answer:

The payback method Miln Limited is considering investing in some new machinery. The following information has been prepared to support the project: ...

Verified Answer:

The following net cash flows relate to Lockhart Limited in connection with a certain project that has an initial cost of £2,500,000: ...

Verified Answer:

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: ...

Verified Answer:

Buchan Enterprises is considering investing in a new machine. The machine will be purchased on 1 January in Year 1 at a cost of £50,000. It is estimated that it will last for five years, and it will then be sold at the end of the year for £2000 in cash. The respective net cash flows estimated ...

Verified Answer: