Question

Which of the following statement(s) is / are false regarding accounting rate of return?
(i) Depreciation is not considered for its calculation
(ii) Depreciation is added back to the annual income
(iii) For decision making ARR of a project is compared with that of the firm or industry as a whole
(iv) If ARR is greater than one for a project it should be accepted.
(v) For calculating average annual income non-cash expenses are also deducted from sales revenue.

• A. ii and iv only
• B. i, ii and iv only
• C. ii, iii and v only
• D. iii, iv and v only

Answer 1

The correct option is B i, ii and iv only

Accounting rate of return (ARR) = Average annual profit after tax / average book value of investment
Depreciation is not added back to the average profit after tax.
ARR of a project is compared with the ARR of the firm as a whole or against some external yardstick like the average rate of return for the industry as a whole.