Note that the amount of £25k that has already been spent on developing the website is not included in this analysis, as it represents a sunk cost. The decision rule for ARR is that a project should be accepted if it can achieve the target ARR for the business. Where there is more than one project and not all possible projects can be undertaken, then the project or projects giving the greatest ARR should be chosen.

Danni and Sam currently achieve an average return on capital employed in their existing businesses of 21%. Calculate the ARR for the bottles project, and advise Danni and Sam on whether they should consider proceeding further with this project.

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Table 15.3 The bottles project Time In previous year Cost of the time spent and the expenses incurred by Danni and Sam while researching this venture Cost of moulding machines At start At start After one year Grant from The Ten Green Trust, who would support this project because of its positive environmental impact (non-refundable grant)* Operating profit from bottle sales, before depreciation After two years Operating profit from bottle sales, before depreciation After three years Operating profit from bottle sales, before depreciation After four years Operating profit from bottle sales, before depreciation After four years Scrap value of machines The grant can be deducted from the cost of the moulding machines. '000 40 1,500 200 360 550 710 340 100