91Ó°ÊÓ

The accounting rate of return refers to the percentage calculated under capital budgeting using the net income generated and the initial investment made It does not take into consideration the time value of money.

$\begin{array}{c}\mathrm{ARR}=\frac{\mathrm{Average}\mathrm{annual}\mathrm{operating}\mathrm{income}}{\mathrm{Average}\mathrm{amount}\mathrm{invested}}\\ =\frac{\mathrm{\$}1,229,042}{\mathrm{\$}5,800,000}\\ =21.19\mathrm{\%}\end{array}$

Working note:

$\begin{array}{c}\mathrm{Averageannualnetcashflow}=\left(\begin{array}{l}\mathrm{Number}\mathrm{of}\mathrm{additional}\mathrm{skiers}×\mathrm{Average}\mathrm{number}\mathrm{of}\mathrm{days}\mathrm{allow}\mathrm{skiing}×\\ \left(\mathrm{Average}\mathrm{cash}\mathrm{spent}\mathrm{by}\mathrm{skier}−\mathrm{Average}\mathrm{variable}\mathrm{cost}\mathrm{per}\mathrm{skier}\right)\end{array}\right)\\ =\left(121×142\left(\mathrm{\$}241−\mathrm{\$}83\right)\right)\\ =\mathrm{\$}2,714,756\end{array}$

$\begin{array}{c}\mathrm{Average}\text{ }\mathrm{annual}\text{ }\mathrm{operating}\text{ }\mathrm{income}=\mathrm{Average}\text{ }\mathrm{annual}\text{ }\mathrm{net}\text{ }\mathrm{cash}\text{ }\mathrm{inflow}−\mathrm{Depreciation}\\ =\mathrm{\$}2,714,756−\mathrm{\$}1,485,714.29\\ =\mathrm{\$}1,229,042\end{array}$

Calculation of depreciation on a straight-line method

$\begin{array}{c}\mathrm{Depreciation}=\frac{\mathrm{Cost}−\mathrm{Residual}\text{ }\mathrm{value}}{\mathrm{Year}}\\ =\frac{\mathrm{\$}11,000,000−\mathrm{\$}600,000}{7}\\ =\mathrm{\$}1,485,714\end{array}$

$\begin{array}{c}\mathrm{Average}\mathrm{amount}\mathrm{invested}=\frac{\mathrm{Amount}\mathrm{invested}+\mathrm{Residual}\mathrm{value}}{2}\\ =\frac{\mathrm{\$}11,000,000+\mathrm{\$}600,000}{2}\\ =\mathrm{\$}5,800,000\end{array}$