Self-Study Practice 3: Computing Accounting

Rate of Return

An investment requires an initial outlay of P100,000 and has a 5-year life with no
salvage value. The yearly cash flows are P50,000, P50,000, P60,000, P50,000, and
P70,000.
Required:
1.Calculate the annual net income for each of the 5 years.
2.Calculate the accounting rate of return.
 
Solutions:
Solution:
1.Yearly Depreciation Expense = (P100,000 – P0)/5 years = $20,000
Annual Net Income = Net Cash Flow – Depreciation Expense
Year 1 Net Income = P50,000 – P20,000 = P30,000
Year 2 Net Income = P50,000 – P20,000 = P30,000
Year 3 Net Income = P60,000 – P20,000 = P40,000
Year 4 Net Income = P50,000 – P20,000 = P30,000
Year 5 Net Income = P70,000 – P20,000 = P50,000
2. 
2.Total Net Income (5 Years) = P180,000
Average Net Income = P180,000/5 = P36,000
Accounting Rate of Return = P36,000/100,000 = 0.36 or 36%