25.5.A.2 - Accounting Rate of Return (ARR)
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Practice Questions
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What does ARR stand for?
💡 Hint: Think of an acronym that combines accounting and returns.
If an investment of $80,000 yields $8,000 annually, what is the ARR?
💡 Hint: Use the formula ARR = (Annual Profit / Initial Investment) x 100.
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Interactive Quizzes
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What is the formula for ARR?
💡 Hint: Remember, it's all about the average profit compared to what was initially spent.
True or False: The Accounting Rate of Return considers the time value of money.
💡 Hint: Think about whether money earned today is worth the same as money earned in the future.
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Challenge Problems
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Imagine a tech startup is evaluating two projects: Project A requires an investment of $250,000 with an average expected annual profit of $35,000, while Project B needs $300,000 with an expected annual profit of $50,000. Calculate the ARR for both projects and determine which project appears more attractive based on ARR. Consider what other factors might influence this decision.
💡 Hint: Remember to calculate each ARR to compare effectively!
A company has to choose between a short-term project with a quick ARR and a long-term project with higher NPV. Project X has an ARR of 25%, while Project Y has an NPV of $50,000 but a lower ARR. Discuss the potential decision-making pitfalls when using solely ARR to evaluate Project X versus Project Y.
💡 Hint: Think about the long-term benefits versus immediate returns.
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