Get premium membership and access questions with answers, video lessons as well as revision papers.
Definition:
ARR = the ratio of average profits, after depreciation, to the capital invested.
However, there are numerous variations and interpretations to this definition for the following reasons:
- Profits may be before or after tax.
- Capital invested may mean the initial capital investment or the average capital invested.
- Capital may or may not include working capital.
Calculation of ARR
Capital invested could be taken to mean either
(i) Initial capital, or
(ii) Average capital
Advantage:
(i) It is simple to calculate.
Disadvantages:
(i) Does not allow for timing of outflows and inflows. i.e. projects may be ranked equally even if there are clear differences in timings;
(ii) Uses as measure of return the concept of accounting profit. Profit has subjective element, is subject to accounting convention and is not as appropriate for investment appraisal purposes as the Cash flows generated by the project;
(iii) There is no universally accepted method of calculating ARR.
Titany answered the question on November 15, 2021 at 08:51
- Methods of Investment Appraisal(Solved)
Methods of Investment Appraisal
Date posted: November 15, 2021. Answers (1)
- Methods of Appraisal(Solved)
Methods of Appraisal
Date posted: November 15, 2021. Answers (1)
- Principles of Cost Benefit Analysis (Solved)
Principles of Cost Benefit Analysis
Date posted: November 15, 2021. Answers (1)
- Steps in Cost Benefit Analysis (Solved)
Steps in Cost Benefit Analysis
Date posted: November 15, 2021. Answers (1)
- Describe the Relationship Between Cost Benefit Analysis and Time in Project Management(Solved)
Describe the Relationship Between Cost Benefit Analysis and Time in Project Management
Date posted: November 15, 2021. Answers (1)
- Components of Cost Benefit Analysis(Solved)
Components of Cost Benefit Analysis
Date posted: November 15, 2021. Answers (1)
- Uses of cost benefit analysis with respect to project management(Solved)
Uses of cost benefit analysis with respect to project management
Date posted: November 15, 2021. Answers (1)
- What is cost benefit analysis with respect to project management?(Solved)
What is cost benefit analysis with respect to project management?
Date posted: November 15, 2021. Answers (1)
- What is project selection?(Solved)
What is project selection?
Date posted: November 15, 2021. Answers (1)
- Contents of a feasibility report(Solved)
Contents of a feasibility report
Date posted: November 15, 2021. Answers (1)
- Describe financial feasibility analysis of a project(Solved)
Describe financial feasibility analysis of a project
Date posted: November 15, 2021. Answers (1)
- Describe social/political feasibility analysis of a project(Solved)
Describe social/political feasibility analysis of a project
Date posted: November 15, 2021. Answers (1)
- Describe environmental feasibility analysis of a project(Solved)
Describe environmental feasibility analysis of a project
Date posted: November 15, 2021. Answers (1)
- Describe administrative/managerial feasibility analysis of a project(Solved)
Describe administrative/managerial feasibility analysis of a project
Date posted: November 15, 2021. Answers (1)
- Describe economic feasibility analysis of a project(Solved)
Describe economic feasibility analysis of a project
Date posted: November 15, 2021. Answers (1)
- Describe technical feasibility analysis of a project(Solved)
Describe technical feasibility analysis of a project
Date posted: November 15, 2021. Answers (1)
- Importance of Feasibility Analysis(Solved)
Importance of Feasibility Analysis
Date posted: November 15, 2021. Answers (1)
- Areas that feasibility analysis of a project covers(Solved)
Areas that feasibility analysis of a project covers
Date posted: November 15, 2021. Answers (1)
- Stages of Feasibility Analysis(Solved)
Stages of Feasibility Analysis
Date posted: November 15, 2021. Answers (1)
- Projects that do not undergo feasibility analysis(Solved)
Projects that do not undergo feasibility analysis
Date posted: November 15, 2021. Answers (1)