Accounting Rate of Return Essay Example

that it is easy to understand. Disadvantages Unlike other methods of investment appraisal, the ARR is based on profits rather than cashflow. So it is affected by subjective, non-cash items such as the rate of depreciation you use to calculate profits.

The ARR also fails to take into account the timing of profits. In calculating ARR, a ? 100,000 profit five years away is given just as much weight as a ? 100,000 profit next year. In reality, you would prefer to get the profit sooner rather than later. See the page in this guide on discounting future cashflow. There are also several different formulas that can be used to calculate an ARR. If you use the ARR to compare different investments, you must be sure that you are calculating the ARR on a consistent basis.