Accounting for Managers: Interpreting accounting information for decision-making

STRATEGIC INVESTMENT DECISIONS 185

Table 12.3 ARR/ROI for Project 1

Year Cash flow Depreciation Profit Investment ROI

1 25,000 20,000 5,000 80,000 6.25%

2 25,000 20,000 5,000 60,000 8.3%

3 25,000 20,000 5,000 40,000 12.5%

4 25,000 20,000 5,000 20,000 25%

5 25,000 20,000 5,000 0

The average ROI for Project 1 is:

25 , 000 / 5

100 , 000 / 2

=

5 , 000

50 , 000

=10%

The accounting rate of return for Project 2 is shown in Table 12.4.
The average ROI for Project 2 is:

50 , 000 / 5

125 , 000 / 2

=

10 , 000

62 , 500

=16%

The accounting rate of return for Project 3 is shown in Table 12.5.
The average ROI for Project 3 is:

10 , 000 / 5

200 , 000 / 2

=

2 , 000

100 , 000

=2%

Table 12.4 ARR/ROI for Project 2

Year Cash flow Depreciation Profit Investment ROI

1 35,000 25,000 10,000 100,000 10%

2 35,000 25,000 10,000 75,000 13.3%

3 35,000 25,000 10,000 50,000 20%

4 35,000 25,000 10,000 25,000 40%

5 35,000 25,000 10,000 0

Table 12.5 ARR/ROI for Project 3

Year Cash flow Depreciation Profit Investment ROI

1 60,000 50,000 10,000 160,000 6.25%

2 60,000 50,000 10,000 120,000 8.3%

3 80,000 50,000 30,000 80,000 37.5%

4 30,000 50,000 −20,000 40,000 −50%

5 30,000 50,000 −20,000 0