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XYZ Company is considering building a new warehouse in Yas. It will require an initial...

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Accounting

XYZ Company is considering building a new warehouse in Yas. It will require an initial capital investment of $ 10 000. The investment will have a three-year life, and will be depreciated on a straight line basis to a zero book value over the next three years.

The new project will generate the following net income over each of the next three years for the company:

Year

Expected Net Income ($)

1

500

2

1,000

3

1,500

  1. Calculate the Accounting Rate of Return (ARR) for this investment.
  2. Should the Company accept the project if the required rate of return was 15%? Explain.

  1. Considering the advantages of the Accounting Rate of Return Method, evaluate the use of ARR method on the company investment decision.

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