Business – 10.3 Investment appraisal – Payback and ARR | e-Consult
10.3 Investment appraisal – Payback and ARR (1 questions)
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Step 1 – Calculate total accounting profit:
| Year 1 | $30,000 |
| Year 2 | $35,000 |
| Year 3 | $40,000 |
| Year 4 | $45,000 |
| Total | $150,000 |
Step 2 – Average annual accounting profit = \$150,000 ÷ 4 = \$37,500
Step 3 – ARR = (\$37,500 ÷ \$120,000) × 100% = 31.25%
Since 31.25% > 20%, the project meets the company’s required ARR and should be accepted.