What have you learnt about the ARR method?

ARR INFO

100

What does ARR mean?

Average rate of return

200

The ARR method was present in which century? 

The early 20th century

300

What is the ARR formula?

Average investment= (Original cost + Salvage value) divided by 2

ARR= Average estimated net income + Average investment 

400

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.

500

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.