Profit after

Profit before depreciation

depreciation

Year 1 240,000.00 120,000.00 120,000.00

Year 2 290,000.00 120,000.00 170,000.00
Year 3 400,000.00 120,000.00 280,000.00
Year 4 490,000.00 120,000.00 370,000.00
Year 5 200,000.00 120,000.00 80,000.00

Solution:
𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑=3 𝑦𝑟𝑠+ (1,200,000 −(240,000+290,000+400,000))/490,000 𝑥 12 𝑚𝑜𝑛𝑡ℎ𝑠

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑=3 𝑦𝑟𝑠+270,000/490,000 𝑥 12 𝑚𝑜𝑛𝑡ℎ𝑠

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑=3 𝑦𝑟𝑠+0.55 𝑥 12 𝑚𝑜𝑛𝑡ℎ𝑠

𝑃𝑎𝑦𝑏𝑎𝑐𝑘 𝑝𝑒𝑟𝑖𝑜𝑑=3 𝑦𝑟𝑠+6.61 𝑚𝑜𝑛𝑡ℎ𝑠

𝑷𝒂𝒚𝒃𝒂𝒄𝒌 𝒑𝒆𝒓𝒊𝒐𝒅=𝟑 𝒚𝒓𝒔+𝟕 𝒎𝒐𝒏𝒕𝒉𝒔

 X
Acquistion cost 80,000.00
Life 5
Profits before depreciation
Year 1 50,000.00
Year 2 50,000.00
Year 3 30,000.00
Year 4 20,000.00
Year 5 10,000.00

Depreciation for X = 16,000.00

Profit before depreciation

Year 1 50,000.00
Year 2 50,000.00
Year 3 30,000.00
Year 4 20,000.00
Year 5 10,000.00
Average

Accounting Rate of Return = 40%

Depreciation for Y = 30,000.00

Profit before depreciation

Year 1 50,000.00
Year 2 50,000.00
Year 3 60,000.00
Year 4 60,000.00
Year 5 60,000.00
Average

Accounting Rate of Return = 34.67%

Using Accounting Rate of Return, ABC Company will get a 40%
return if they choose the machine X, while if they choose the
machine Y, they will only get a 34.67% return. It means
machine X should be selected or accepted by ABC Company
because the higher the ARR, the more profitable the company
will become.
 Y
150,000.00
5

50,000.00
50,000.00
60,000.00
60,000.00
60,000.00

rofit before depreciation Profit after Beginning Book Ending Book Value Average Book
depreciation Value Value
16,000.00 34,000.00 80,000.00 64,000.00 72,000.00
16,000.00 34,000.00 64,000.00 48,000.00 56,000.00
16,000.00 14,000.00 48,000.00 32,000.00 40,000.00
16,000.00 4,000.00 32,000.00 16,000.00 24,000.00
16,000.00 - 6,000.00 16,000.00 - 8,000.00
16,000.00 40,000.00

rofit before depreciation Profit after Beginning Book Ending Book Value Average Book
depreciation Value Value
30,000.00 20,000.00 150,000.00 120,000.00 135,000.00
30,000.00 20,000.00 120,000.00 90,000.00 105,000.00
30,000.00 30,000.00 90,000.00 60,000.00 75,000.00
30,000.00 30,000.00 60,000.00 30,000.00 45,000.00
30,000.00 30,000.00 30,000.00 - 15,000.00
26,000.00 75,000.00