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5 go 22. Alpha Ltd wishes to invest in a new machine which will cost £20,000, have a useful economic life of 6 years after which it will have a scrap value of £2,000. The net inflows from the machine are expected to be £5,000 per year before depreciation is deducted on a straight-line basis. Required: Which of the following is the Accounting rate of return? a. 18% b. 22% с. 45% d. 67% MG1052 Introduction to Accounting Page 5 of 7
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Answer: Option-(a): 18% Reason: Accounting rate of return (ARR) Average annual net income /Average investment, where: Annual depreciation (Initial investment - Expected salvage value)/Useful life of the asset; Average investment (Initial investment+ Expected salvage value) /2. Therefore, Annual net cash inflows Less: Annual depreciation Average annual net income Average investment Accounting rate of return (ARR) £5,000 [Given] E3,000 [(20,000-2,000)/6 years] £2,000 £11,000 [(20,000 +2,000)/2] 18% [2,000 / 11,000]

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