A rural poultry farm cost 5,000,000 to set and has a scrap valve of 1,000,000 it's stream of income before depreciation and tax during the first five years, 1,000,000,1.2m, 1.4m, 1.6m,2m .If the depreciation is on a straight line basis and tax rate of 5 0 percent calculate the accounting rate of return 

To calculate the Accounting Rate of Return (ARR) for the rural poultry farm, we'll follow these steps:

1. **Calculate the Depreciation Expense:**

   Depreciation on a straight-line basis is calculated as:

   \[
   \text{Depreciation} = \frac{\text{Cost of the Farm} - \text{Scrap Value}}{\text{Useful Life}}
   \]

   Given:
   - Cost of the farm = 5,000,000
   - Scrap value = 1,000,000
   - Useful life = 5 years

   \[
   \text{Depreciation} = \frac{5,000,000 - 1,000,000}{5} = \frac{4,000,000}{5} = 800,000 \text{ per year}
   \]

2. **Calculate the Net Income Before Tax for Each Year:**

   Net Income Before Tax = Income Before Depreciation and Tax - Depreciation

   \[
   \text{Year 1:} \quad 1,000,000 - 800,000 = 200,000
   \]
   \[
   \text{Year 2:} \quad 1,200,000 - 800,000 = 400,000
   \]
   \[
   \text{Year 3:} \quad 1,400,000 - 800,000 = 600,000
   \]
   \[
   \text{Year 4:} \quad 1,600,000 - 800,000 = 800,000
   \]
   \[
   \text{Year 5:} \quad 2,000,000 - 800,000 = 1,200,000
   \]

3. **Calculate the Net Income After Tax:**

   Tax rate = 50%

   Net Income After Tax for each year is:

   \[
   \text{Year 1:} \quad 200,000 \times 0.5 = 100,000
   \]
   \[
   \text{Year 2:} \quad 400,000 \times 0.5 = 200,000
   \]
   \[
   \text{Year 3:} \quad 600,000 \times 0.5 = 300,000
   \]
   \[
   \text{Year 4:} \quad 800,000 \times 0.5 = 400,000
   \]
   \[
   \text{Year 5:} \quad 1,200,000 \times 0.5 = 600,000
   \]

4. **Calculate the Average Annual Net Income After Tax:**

   \[
   \text{Average Annual Net Income} = \frac{\sum \text{Net Income After Tax}}{5}
   \]
   \[
   = \frac{100,000 + 200,000 + 300,000 + 400,000 + 600,000}{5} = \frac{1,600,000}{5} = 320,000
   \]

5. **Calculate the Accounting Rate of Return (ARR):**

   \[
   \text{ARR} = \frac{\text{Average Annual Net Income}}{\text{Initial Investment}} \times 100
   \]

   Initial Investment (Cost of the farm) = 5,000,000

   \[
   \text{ARR} = \frac{320,000}{5,000,000} \times 100 = 6.4\%
   \]

So, the Accounting Rate of Return (ARR) is **6.4%**.

Would you like to dive deeper into any of these calculations?

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**Related Questions:**

1. How does the ARR compare to the Internal Rate of Return (IRR)?
2. What are the limitations of using ARR as a performance metric?
3. How would changing the tax rate impact the ARR?
4. Can you explain how the straight-line depreciation method affects ARR?
5. What is the significance of a farm's scrap value in ARR calculations?
6. How would an increase in the initial investment affect the ARR?
7. What alternative methods can be used to evaluate the profitability of a farm?
8. How does ARR differ from the Payback Period method?

**Tip:** The ARR method doesn't consider the time value of money, which is an important factor in investment decisions. Consider using Net Present Value (NPV) or IRR for a more comprehensive analysis.

Learn how to calculate the Accounting Rate of Return (ARR) for a rural poultry farm using straight-line depreciation and tax considerations. This detailed solution covers the initial investment, net income calculations, depreciation, and tax implications over a 5-year period.

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