Accounting for Managers: Interpreting accounting information for decision-making

430 ACCOUNTING FOR MANAGERS

Table A2.23

Year 0 Year 1 Year 2 Year 3

Cash flows 1,000 800 700

Present value 2,029

Initial investment −2,000

NPV 29

Accounting rate of return

Total Depreciation Profit Average ARR

cash flow profit

Project A 640 70 570 114 65.1%

Project B 770 70 700 140 80%

Project C 630 70 560 112 64%

Average investment £350, 000 / 2 =£175, 000

ARR is average profit (profit/5 years)

Average investment

NPV

See Table A2.24.

Table A2.24

Project A Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 100 200 100 100 140
Present value 499
Initial investment − 350
NPV 149

Project B Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 40 100 210 260 160
Present value 571
Initial investment − 350
NPV 221

Project C Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Cash flows 200 150 240 40 0
Present value 523
Initial investment − 350
NPV 173

IRR
Project A 24%
Project B 26%
Project C 33%