ARR

• What are the 3 main methods of investment appraisal ?

  -payback - the time it takes for a project to repay its initial investment

  -ARR - total accounting return for a project to see if it meets the target return

  -discounted cash flow - net present value calculates the monetary value now of the projects future cash flows
• Calculating ARR


  • calculate average annual profit from the investment project
  • divide it by the initial investment
  • compare with the target percentage return
• Benefits of using ARR


  -simple and easy

  -focuses on overall profitability

  -easy to compare with other key target rates of return to help make a decision

  -uses all the returne generated by a project
• Drawbacks of using ARR


  -ignores the timing of returns

  -focused on profits rather than cash flows

  -does not adjust for the time-value of money