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    Question

    The project is requiring an investment of 40000 and is

    depreciated on a SLM basis and the Cash Inflows of the project are the following, what is the ARR? Year Cash flows 1 6000 2 9000 3 7000 4 8000 5 10000
    A 20% Correct Answer Incorrect Answer
    B 40% Correct Answer Incorrect Answer
    C 60% Correct Answer Incorrect Answer
    D 80% Correct Answer Incorrect Answer
    E 100% Correct Answer Incorrect Answer

    Solution

    In this case we need to convert Cash flows to profits like the following: Profits = Cash inflows + depreciation. Here depreciation is (40000/5) = 8000. So, average profits = 16000 and the average investment = 20000. ARR= Average profits/ Average investment. Therefore, ARR = 16000/20000 = 80%

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