JKL Ltd is considering investing in a project which requires an immediate investment of £345,000 for machinery. There will be net cash inflows of £120,000 for each of the first two years, £50,000 in each of years 3, 4 and 5. The machine has a residual value of £35,000 at the end of year 5. Calculate the Accounting Rate of Return (ARR) for this investment.

Question 2 options:

10%

42%

8%

23%

To calculate the Accounting Rate of Return (ARR) for the investment, we use the formula:

\[
\text{ARR} = \left(\frac{\text{Average Annual Accounting Profit}}{\text{Initial Investment}}\right) \times 100
\]

### Step 1: Calculate Total Net Cash Inflows
First, we calculate the total net cash inflows over the 5 years:

\[
\text{Total Net Cash Inflows} = (120,000 \times 2) + (50,000 \times 3) + 35,000 = 240,000 + 150,000 + 35,000 = 425,000 \text{ GBP}
\]

### Step 2: Calculate the Total Profit
The total profit over 5 years is the total net cash inflows minus the initial investment:

\[
\text{Total Profit} = 425,000 - 345,000 = 80,000 \text{ GBP}
\]

### Step 3: Calculate the Average Annual Accounting Profit
Now, we find the average annual profit over the 5 years:

\[
\text{Average Annual Accounting Profit} = \frac{80,000}{5} = 16,000 \text{ GBP}
\]

### Step 4: Calculate the ARR
Finally, use the ARR formula:

\[
\text{ARR} = \left(\frac{16,000}{345,000}\right) \times 100 \approx 4.64\%
\]

However, since the provided answer choices do not include 4.64%, let's re-evaluate this. The most likely consideration for ARR might include calculating without deducting the initial investment.

### Alternative Approach: Recalculating ARR
Sometimes ARR is calculated using the average investment, which can be:

\[
\text{Average Investment} = \frac{\text{Initial Investment} + \text{Residual Value}}{2} = \frac{345,000 + 35,000}{2} = 190,000 \text{ GBP}
\]

Then ARR:

\[
\text{ARR} = \left(\frac{16,000}{190,000}\right) \times 100 \approx 8.42\%
\]

Thus, the closest provided choice is **8%**.

### Final Answer:
The correct option is **8%**.

---

Would you like more details or have any other questions? Here are some related questions to expand your understanding:

1. How is the Payback Period calculated for this investment?
2. What are the advantages of using ARR as a performance metric?
3. How does ARR differ from other investment appraisal methods like NPV or IRR?
4. What impact does the residual value of machinery have on the ARR calculation?
5. How could changing the lifespan of the machinery affect the ARR?

**Tip:** When comparing different investments, it's useful to combine ARR with other methods like NPV (Net Present Value) and IRR (Internal Rate of Return) for a more comprehensive analysis.

Learn how to calculate the Accounting Rate of Return (ARR) for an investment in a £345,000 machinery project. This problem involves determining ARR using net cash inflows and initial investment data over a 5-year period. Suitable for financial analysts and business professionals.

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