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 follow these steps:

### 1. **Calculate Depreciation:**

The farm is set up with a cost of ₦5,000,000 and has a salvage value of ₦1,000,000 after 5 years. Using the straight-line method, depreciation is calculated as:

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

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

### 2. **Calculate Net Income after Depreciation:**

Next, we calculate the net income after accounting for depreciation. This is done by subtracting the annual depreciation from the income before depreciation and taxes for each year:

\[
\text{Net Income} = \text{Income Before Depreciation and Taxes} - \text{Annual Depreciation}
\]

**Year 1:**
\[
1,000,000 - 800,000 = 200,000 \, \text{₦}
\]

**Year 2:**
\[
1,200,000 - 800,000 = 400,000 \, \text{₦}
\]

**Year 3:**
\[
1,400,000 - 800,000 = 600,000 \, \text{₦}
\]

**Year 4:**
\[
1,600,000 - 800,000 = 800,000 \, \text{₦}
\]

**Year 5:**
\[
2,000,000 - 800,000 = 1,200,000 \, \text{₦}
\]

### 3. **Calculate Average Net Income:**

The average net income over the 5 years is calculated by adding up the net income for each year and dividing by the number of years:

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

### 4. **Calculate Initial Investment:**

The initial investment for the farm is the cost of setting it up, which is ₦5,000,000.

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

The ARR is calculated as:

\[
\text{ARR} = \left(\frac{\text{Average Net Income}}{\text{Initial Investment}}\right) \times 100\%
\]

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

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

Would you like further details or have any questions?  

Here are 5 related questions to deepen your understanding:

1. How would the ARR change if the income stream varied differently over the 5 years?
2. What impact would a higher tax rate have on the ARR?
3. How is ARR different from other investment appraisal techniques like NPV or IRR?
4. What assumptions are made when using the straight-line depreciation method?
5. How does the salvage value affect the depreciation calculation and ARR?

**Tip:** ARR is a simple metric but doesn’t consider the time value of money, which can be a significant factor in long-term projects.

Learn how to calculate the Accounting Rate of Return (ARR) for a rural poultry farm with detailed step-by-step calculations. Includes depreciation calculation using straight-line method and financial analysis of income streams over 5 years. Suitable for college-level financial analysis and accounting studies.

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