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Meeta Ltd is considering investing in a project requiring a capital outlay of rs 400000. Forecast of annual income after depreciation but before tax is as follows: Years: 1. 2. 3. 4. 5. Rs:. 200000 200000. 160000. 160000. 80000 Depreciation is 20% on original cost and income tax at 50% of net income. Calculate accounting rate of return?
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Calculation of Accounting Rate of Return


Step 1: Calculation of Annual Depreciation

Annual Depreciation is calculated as 20% of the original cost i.e. Rs 400000 * 20% = Rs 80000.


Step 2: Calculation of Annual Net Income after Depreciation

Annual Net Income after Depreciation is calculated as Annual Income - Annual Depreciation.


  • Year 1: Rs 200000 - Rs 80000 = Rs 120000

  • Year 2: Rs 200000 - Rs 80000 = Rs 120000

  • Year 3: Rs 160000 - Rs 80000 = Rs 80000

  • Year 4: Rs 160000 - Rs 80000 = Rs 80000

  • Year 5: Rs 80000 - Rs 80000 = Rs 0



Step 3: Calculation of Annual Net Income after Tax

Annual Net Income after Tax is calculated as Annual Net Income after Depreciation - Income Tax.


  • Year 1: Rs 120000 - (50% * Rs 120000) = Rs 60000

  • Year 2: Rs 120000 - (50% * Rs 120000) = Rs 60000

  • Year 3: Rs 80000 - (50% * Rs 80000) = Rs 40000

  • Year 4: Rs 80000 - (50% * Rs 80000) = Rs 40000

  • Year 5: Rs 0 - (50% * Rs 0) = Rs 0



Step 4: Calculation of Average Annual Net Income after Tax

Average Annual Net Income after Tax is calculated as the sum of Annual Net Income after Tax for all years divided by the number of years.

Average Annual Net Income after Tax = (Rs 60000 + Rs 60000 + Rs 40000 + Rs 40000 + Rs 0) / 5 = Rs 32000

Step 5: Calculation of Accounting Rate of Return

Accounting Rate of Return is calculated as Average Annual Net Income after Tax divided by the original cost multiplied by 100%.

Accounting Rate of Return = (Rs 32000 / Rs 400000) * 100% = 8%

Explanation

Accounting Rate of Return is a financial ratio that measures the profitability of an investment. It is calculated by dividing the average annual net income after tax by the original cost of the investment. In this case, the accounting rate of return is 8%, which means that the investment is expected to generate an average annual net income after tax of Rs 32000 for every Rs 400000 invested. This ratio helps the management of Meeta Ltd to evaluate the investment opportunity and make informed decisions about whether to invest or not.
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Meeta Ltd is considering investing in a project requiring a capital outlay of rs 400000. Forecast of annual income after depreciation but before tax is as follows: Years: 1. 2. 3. 4. 5. Rs:. 200000 200000. 160000. 160000. 80000 Depreciation is 20% on original cost and income tax at 50% of net income. Calculate accounting rate of return?
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Meeta Ltd is considering investing in a project requiring a capital outlay of rs 400000. Forecast of annual income after depreciation but before tax is as follows: Years: 1. 2. 3. 4. 5. Rs:. 200000 200000. 160000. 160000. 80000 Depreciation is 20% on original cost and income tax at 50% of net income. Calculate accounting rate of return? for B Com 2024 is part of B Com preparation. The Question and answers have been prepared according to the B Com exam syllabus. Information about Meeta Ltd is considering investing in a project requiring a capital outlay of rs 400000. Forecast of annual income after depreciation but before tax is as follows: Years: 1. 2. 3. 4. 5. Rs:. 200000 200000. 160000. 160000. 80000 Depreciation is 20% on original cost and income tax at 50% of net income. Calculate accounting rate of return? covers all topics & solutions for B Com 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Meeta Ltd is considering investing in a project requiring a capital outlay of rs 400000. Forecast of annual income after depreciation but before tax is as follows: Years: 1. 2. 3. 4. 5. Rs:. 200000 200000. 160000. 160000. 80000 Depreciation is 20% on original cost and income tax at 50% of net income. Calculate accounting rate of return?.
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