ARR INFO
What does ARR mean?
Average rate of return
The ARR method was present in which century?
The early 20th century
What is the ARR formula?
Average investment= (Original cost + Salvage value) divided by 2
ARR= Average estimated net income + Average investment
Give one advantage of the ARR method
Simplicity – Easy to understand and calculate using accounting profits.
Uses Accounting Profits – Focuses on profits that businesses are familiar with, unlike other methods that rely on cash flows.
Helps in Decision-Making – Provides a quick estimate to compare different investment opportunities.
Consistency with Financial Reporting – Uses net income figures that align with financial statements.
Give one disadvantage of the ARR method
Ignores Time Value of Money (TVM) – Fails to account for the fact that money today is worth more than money in the future.
Based on Accounting Profits – Does not consider actual cash flows, leading to potential misrepresentation.
Ignores Risk and Inflation – Does not incorporate risk factors or inflation adjustments.
No Consideration for Project Duration – A project with a higher ARR but shorter lifespan may be less beneficial in the long run.