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Basic investment appraisal techniques

Return on capital employed (ROCE)

1.1 Calculation

Also known as the accounting rate of return (ARR). Two methods of calculation:

Average annual profits before interest and tax
ROCE = ––––––––––––––––––––––––––––––––––––––––– × 100
Initial capital costs

or alternatively:

Average annual profits before interest and tax
ROCE = ––––––––––––––––––––––––––––––––––––––––– × 100
Average capital investment

Average capital investment = (initial investment + scrap value)/2

1.2 Decision criteria

Decision criteria

 Compare the ROCE to the target return and if it is larger than the
target the project should be accepted.

 Ensure you know how the target return has been calculated
(initial or average basis) to make a like-for-like comparison.

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