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ARR Formula

sahis (CA Final,BBA) (164 Points)

08 March 2011

In ARR calculation, average investment outlay is calculated in my degree classes is (Total outlay/2). But in the ICAI study material, it is calculated as (total outlay/no.of years)

which one is currect and which formula should I use in CA Exams?

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7 Replies

ashay (CA Final Student) (782 Points)
Replied 08 March 2011

ACCOUNTING RATE OF RETURN = AVERAGE ANNUAL NET INCOME / INVESTMENT

AND THE SAME FORMULA SHOULD BE USED IN EXAM

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CA Kanchan Jha (Finance & Accounts Executive) (493 Points)
Replied 09 March 2011

average investment = total outlay/2

average investment = 1/2( initial cost+installation exp-salvage value)+salvage value+additional working capital

2nd formula is used when all the required items are given in the question

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Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 09 March 2011

Steps To Calculate ARR:-

1-- Calculate

Avg. earnings after taxes(during project period) = Total expected earnings after taxes but before interest on long term debt / Total project period.

2-- Calculate Avg. investment in project.

(a) Avg Investment(each year) = (Opening Investment* + closing investment*) / 2

* includes working capital if any.

(b) Avg. Investment(during project period-n) = ( Step 2(a) for 1st yr +..... step 2(a) for n yrs) / n

Short cut formula for calculating avg. investment when SLM of Depreciation is used----

Here, Avg Inv.= 1/2(original cost - salvage value) +salvage value + working capital

3--- At last ,

ARR = STEP 1 result / Avg investment during project period as per step 2(b)

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 09 March 2011

Follow the above steps for all problems relating to ARR. If you need clarification in the above steps, feel free to ask..

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sahis (CA Final,BBA) (164 Points)
Replied 09 March 2011

my confusion not yet clarified. Ashay suggest equation as in the ICAI study material. Kanchan and Faiz suggests what I study. which one I should I use? please clarify it.

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 09 March 2011

Dear Sahis,

Your confusion is genuine as the content given in study material is not explained much. There are also no problems on ARR in study material of ICAI.

The above steps of ARR are from a good book by P.C.Tulsian. You can refer that for numericals also. For capital budgeting chapter refer that book for better understanding + do problems from study materials also.

Y@$#u (ipcc group 2, article) (683 Points)
Replied 16 March 2011

Originally posted by : Faiz Ahmed
	Dear Sahis, Your confusion is genuine as the content given in study material is not explained much. There are also no problems on ARR in study material of ICAI. The above steps of ARR are from a good book by P.C.Tulsian. You can refer that for numericals also. For capital budgeting chapter refer that book for better understanding + do problems from study materials also.