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Chapter 26: Q13RQ (page 1464)

How is ARR calculated?

Short Answer

Expert verified

Answer

ARR=AverageannualoperatingincomeAverageamountinvested

Step by step solution

01

Meaning of ARR

ARR depicts the effect of the investment on the company's accrual-based income.

02

Calculation of ARR

ARR is calculated using accrual accounting rather than net cash inflows. It is required for users of financial statements.Calculation of ARR helps the companies to analyze the profitability of the investment.

The formula that is involved in finding ARR is as follows:

ARR=AverageannualoperatingincomeAverageamountinvested

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Most popular questions from this chapter

Use the NPV method to determine whether Hawkins Products should invest in the

following projects:

鈥� Project A: Costs \(285,000 and offers seven annual net cash inflows of \)55,000. Hawkins Products requires an annual return of 14% on investments of this nature.

鈥� Project B: Costs \(395,000 and offers 10 annual net cash inflows of \)77,000. Hawkins Products demands an annual return of 12% on investments of this nature.

Requirements

1. What is the NPV of each project? Assume neither project has a residual value. Round to two decimal places.

2. What is the maximum acceptable price to pay for each project?

3. What is the profitability index of each project? Round to two decimal places.

How does compound interest differ from simple interest?

Congratulations! You have won a state lottery. The state lottery offers you the following (after-tax) payout options:

Option #1: \(12,000,000 after five years

Option #2: \)2,150,000 per year for five years

Option #3: $10,000,000 after three years

Assuming you can earn 6% on your funds, which option would you prefer?

List some common cash outflows from capital investments.

Describe the capital budgeting process.
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