Question

How does depreciation affect the calculation of a​ project's accounting rate of return​ (ARR)? A. Depreciation does not affect ARR. B. Depreciation is added to the annual cash inflows. C. Depreciation is only deducted if the ARR is less than the minimum required rate of return. D. Depreciation is deducted from the annual cash inflows.

Answer 1

Answer: Option D

Explanation: ACCOUNTING RATE OF RETURN IS THE RETURN THAT INVESTOR GET IN THE FORM OF AVERAGE NET PROFIT FOR MAKING INVESTMENT IN THE BUSINESS AT FIRST PLACE.

A. Depreciation affect net profit thus it affects ARR.

B. Depreciation is an expenditure, it is the value of a asset that is used, therefore it will be deducted from cash inflows.

C. There is no such rule that depreciation will only be deducted if the ARR is less than the minimum required rate.

D. Depreciation results in lowering of value of assets thus it is deducted from annual cash inflows which results in lowering of profits.