Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
Interpolation is necessary Present-value factors
18% 4.494 4.494
IRR rate
–
4.400 20%
4.192
–
Difference 0.302 0.094 Internal rate of return
= 18% +
0.094 0.302 (2%)
= 18% + (0.311) (2%) = 18.62%
4 Accounting rate of return based on net initial investment
Net initial investment = €220,000 Estimated useful life
= 10 years Annual straight-line depreciation = €220,000 ÷ 10 = €22,000
ARR = Increase in expected average
annual operating incomeNet initial investment
=
50, 000 22, 000 220, 000
−
=
28, 000 220, 000
= 12.73% Note how the accrual
accounting rate of return, whichever way calculated, can produce results that differ markedly from the internal rate of return.
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