Can anyone help me -ARR inquiry


Joined
Dec 13, 2011
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Hi All,
While studying ARR (Accounting Rate of Return), I noticed that in a particular example, the average investment was given as initial investment+ final value /2.

specifically,
"The average investment over the five years can be calculated as follows:

Average investment =(Cost of machine + Disposal value) /2

Since, the disposal value is a return on the residual value , shouldn't it be subtracted from the cost.. can anybody please explain with an example.

I thought about this for a while,in real life terms and decided thats its something to do with accounting and does not probably represent real life situations..?

Thanks to All.
 
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Dec 27, 2011
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Basically, disposal value is not return on residual value.

The said treatment is just to give average investment.Like we calculate average stock/average debtor/average creditor in inventory turnover ratio etc etc...

Secondly, to match denominator with numerator. i.e to match average profit with average investment.


CA finalist.(ICAP)
 

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