7.9b Making Investment Decisions - ARR Flashcards

1
Q

ARR meaning

A

Average rate of return

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2
Q

What can ARR be compared with?

A
  • The interest rates the firm pays on the money it borrows for investment
  • The return on other comparable investments
  • A benchmark return
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3
Q

ARR formula

A

ARR (%) = ((total net return / no. of years) / initial cost) x 100

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4
Q

If answer is 15.6% for example what does it suggest?

A

That every £1 worth of investment yields an average 15.6p return each year

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5
Q

Appraisal definition

A

Looking at strengths and weaknesses of something

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6
Q

Advantages of ARR:

A
  • Provides a percentage return which can be compared with target return
  • Looks at whole profitability of the project
  • Focuses on profitability
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7
Q

Disadvantages of ARR:

A
  • Does not take into account cash flows - only profits
  • Takes no account of the time value of money
  • Treats profits arising late in the project in the same way as those which might arise early.
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