A rural poultry farm cost 5,000,000 to set up and as a stable salvage value of 1,000,000. Its stream of income before depreciation and taxes during the first 5 years is: 1,000,000,  1,200,000, 1,400,000, 1,600,000, 2,000,000  . If depreciation is on straight line basis and take rate 50%. Calculate the accounting rate of return

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

### 1. **Calculate the Annual Depreciation:**
The straight-line method of depreciation is used, which means the annual depreciation is calculated as:

\[
\text{Annual Depreciation} = \frac{\text{Initial Cost} - \text{Salvage Value}}{\text{Useful Life}}
\]

Given:
- Initial Cost = 5,000,000
- Salvage Value = 1,000,000
- Useful Life = 5 years

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

### 2. **Calculate the Annual Net Income After Depreciation:**
The net income for each year is calculated by subtracting the depreciation from the income before depreciation and taxes.

For each year:

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

### 3. **Calculate the Average Net Income:**
Now, find the average net income over the 5 years:

\[
\text{Average Net Income} = \frac{200,000 + 400,000 + 600,000 + 800,000 + 1,200,000}{5} = \frac{3,200,000}{5} = 640,000
\]

### 4. **Calculate the Accounting Rate of Return (ARR):**
ARR is calculated as:

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

\[
\text{ARR} = \frac{640,000}{5,000,000} \times 100 = 12.8\%
\]

### Final Answer:
The Accounting Rate of Return (ARR) for the rural poultry farm is **12.8%**.

Would you like to delve deeper into any part of the process or have any further questions?

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Here are five related questions:
1. What are the advantages of using the Accounting Rate of Return (ARR) method?
2. How would the ARR change if the salvage value was different?
3. Can the ARR method be used for decision-making between multiple projects?
4. How does the straight-line method of depreciation compare to other methods in terms of ARR?
5. What are the limitations of the ARR method?

**Tip:** The ARR method doesn't take into account the time value of money, which can be a limitation in long-term projects.

Learn how to calculate the Accounting Rate of Return (ARR) for a rural poultry farm using straight-line depreciation. Detailed step-by-step solution provided with annual income data and financial analysis. Suitable for professionals and students of finance.

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