- 6 Marks
Question
State THREE advantages and THREE disadvantages of the Accounting Rate of Return (ARR) method of investment appraisal.
Answer
- Simplicity
- The ARR method is easy to calculate and understand for decision-makers.
- Comparison
- It allows for easy comparison with the required rate of return or with other investments.
- Use of Accounting Data
- It is based on accounting profits, which are readily available in financial statements, making it convenient to use.
Disadvantages:
- Ignores Time Value of Money
- ARR does not account for the time value of money, which can lead to inaccurate decisions.
- Based on Accounting Profits
- It relies on accounting profits rather than cash flows, which may not reflect the true profitability of the investment.
- Inconsistent Results
- ARR can give inconsistent results when comparing projects with different durations, making it difficult to make the best investment choice.
- Tags: Advantages of ARR, ARR, Disadvantages of ARR, Investment Appraisal
- Level: Level 1
- Topic: Investment Decisions
- Series: NOV 2021
- Uploader: Theophilus