A rural poultry farm cost 5,000,000 to set up and as a scable 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), we follow these steps:

1. **Determine the annual depreciation expense:**

The cost of setting up the poultry farm is 5,000,000, and the salvage value is 1,000,000. The useful life of the asset is 5 years.

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

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

2. **Calculate the annual net income before taxes:**

For each year, we subtract the depreciation expense from the income before depreciation and taxes to find the net income before taxes.

\[
\begin{align*}
\text{Year 1:} & \ 1,000,000 - 800,000 = 200,000 \\
\text{Year 2:} & \ 1,200,000 - 800,000 = 400,000 \\
\text{Year 3:} & \ 1,400,000 - 800,000 = 600,000 \\
\text{Year 4:} & \ 1,600,000 - 800,000 = 800,000 \\
\text{Year 5:} & \ 2,000,000 - 800,000 = 1,200,000 \\
\end{align*}
\]

3. **Calculate the annual net income after taxes:**

The tax rate is 50%. Thus, the net income after taxes for each year is:

\[
\begin{align*}
\text{Year 1:} & \ 200,000 \times (1 - 0.50) = 100,000 \\
\text{Year 2:} & \ 400,000 \times (1 - 0.50) = 200,000 \\
\text{Year 3:} & \ 600,000 \times (1 - 0.50) = 300,000 \\
\text{Year 4:} & \ 800,000 \times (1 - 0.50) = 400,000 \\
\text{Year 5:} & \ 1,200,000 \times (1 - 0.50) = 600,000 \\
\end{align*}
\]

4. **Compute the average annual net income after taxes:**

To find the average annual net income after taxes, we sum the net income after taxes for all years and divide by the number of years.

\[ \text{Total Net Income After Taxes} = 100,000 + 200,000 + 300,000 + 400,000 + 600,000 = 1,600,000 \]

\[ \text{Average Annual Net Income After Taxes} = \frac{1,600,000}{5} = 320,000 \]

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

The ARR is calculated by dividing the average annual net income after taxes by the initial investment.

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

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

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

Do you want details or have any questions?

Here are some related questions:
1. What is the significance of the salvage value in depreciation calculations?
2. How does the straight-line method of depreciation differ from other methods?
3. What is the impact of a higher tax rate on ARR?
4. Can ARR be used to compare investments with different lifespans?
5. How would the ARR change if the income stream were different?
6. What are the limitations of using ARR as a performance metric?
7.

Learn how to calculate the Accounting Rate of Return (ARR) for a poultry farm investment with an initial setup cost of $5,000,000 and a salvage value of $1,000,000. Understand the impact of straight-line depreciation at 50% take rate on annual net income. Suitable for professionals in finance and investment analysis.

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