25.5.A.2. Accounting Rate of Return (ARR)

Try these first

1. 1.

   What does ARR stand for?

   Hint

   Think of an acronym that combines accounting and returns.

2. 2.

   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.

3. 3.

   What is the formula for ARR?

   Hint

   Remember, it's all about the average profit compared to what was initially spent.

4. 4.

   True or False: The Accounting Rate of Return considers the time value of money.

   • True
   • False

   Hint

   Think about whether money earned today is worth the same as money earned in the future.

5. 5.

   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!

6. 6.

   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.