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) for the rural poultry farm, follow these steps:

### Step 1: Calculate Annual Depreciation

The cost to set up the farm is \( 5,000,000 \) and the salvage value is \( 1,000,000 \). The depreciation is calculated using the straight-line method over 5 years.

\[
\text{Annual Depreciation} = \frac{\text{Cost} - \text{Salvage Value}}{\text{Useful Life}} = \frac{5,000,000 - 1,000,000}{5} = 800,000
\]

### Step 2: Calculate Net Income for Each Year

The net income for each year is the income before depreciation and taxes minus depreciation, and then taxes are subtracted.

- **Year 1:**
  \[
  \text{Income before Depreciation and Taxes} = 1,000,000
  \]
  \[
  \text{Depreciation} = 800,000
  \]
  \[
  \text{Income before Taxes} = 1,000,000 - 800,000 = 200,000
  \]
  \[
  \text{Taxes (50%)} = 0.50 \times 200,000 = 100,000
  \]
  \[
  \text{Net Income} = 200,000 - 100,000 = 100,000
  \]

- **Year 2:**
  \[
  \text{Income before Depreciation and Taxes} = 1,200,000
  \]
  \[
  \text{Income before Taxes} = 1,200,000 - 800,000 = 400,000
  \]
  \[
  \text{Taxes (50%)} = 0.50 \times 400,000 = 200,000
  \]
  \[
  \text{Net Income} = 400,000 - 200,000 = 200,000
  \]

- **Year 3:**
  \[
  \text{Income before Depreciation and Taxes} = 1,400,000
  \]
  \[
  \text{Income before Taxes} = 1,400,000 - 800,000 = 600,000
  \]
  \[
  \text{Taxes (50%)} = 0.50 \times 600,000 = 300,000
  \]
  \[
  \text{Net Income} = 600,000 - 300,000 = 300,000
  \]

- **Year 4:**
  \[
  \text{Income before Depreciation and Taxes} = 1,600,000
  \]
  \[
  \text{Income before Taxes} = 1,600,000 - 800,000 = 800,000
  \]
  \[
  \text{Taxes (50%)} = 0.50 \times 800,000 = 400,000
  \]
  \[
  \text{Net Income} = 800,000 - 400,000 = 400,000
  \]

- **Year 5:**
  \[
  \text{Income before Depreciation and Taxes} = 2,000,000
  \]
  \[
  \text{Income before Taxes} = 2,000,000 - 800,000 = 1,200,000
  \]
  \[
  \text{Taxes (50%)} = 0.50 \times 1,200,000 = 600,000
  \]
  \[
  \text{Net Income} = 1,200,000 - 600,000 = 600,000
  \]

### Step 3: Calculate Average Annual Net Income

\[
\text{Average Annual Net Income} = \frac{\sum \text{Net Income}}{\text{Number of Years}}
\]

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

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

### Step 4: Calculate Average Investment

\[
\text{Average Investment} = \frac{\text{Initial Investment} + \text{Salvage Value}}{2}
\]

\[
\text{Average Investment} = \frac{5,000,000 + 1,000,000}{2} = 3,000,000
\]

### Step 5: Calculate Accounting Rate of Return (ARR)

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

\[
\text{ARR} = \frac{320,000}{3,000,000} \times 100\% = 10.67\%
\]

The Accounting Rate of Return (ARR) is \( 10.67\% \).

Would you like more details or have any questions?

Here are 8 questions to expand on the information provided:

1. How is the straight-line depreciation method different from other methods?
2. What are the advantages of using ARR over other investment appraisal methods?
3. How does the tax rate impact the net income calculation?
4. Can ARR be applied to investments with variable income streams?
5. What are the limitations of using ARR for decision-making?
6. How would changes in salvage value affect the ARR?
7. What are alternative methods to calculate the rate of return on investments?
8. How does ARR compare to other profitability metrics such as NPV or IRR?

**Tip:** Always consider the tax implications when calculating investment returns, as they significantly impact net income and overall profitability.

Learn how to calculate the Accounting Rate of Return (ARR) for a rural poultry farm investment using the straight-line depreciation method and tax considerations. Follow a detailed step-by-step solution with annual income data and depreciation calculations.

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