Investment Appraisal

Question 1

Advantages of ARR

Answer 1

• It is easy to understand.
• It is simple to calculate.

Question 2

Disadvantages of ARR

Answer 2

• Profit for the year can be subject to different definitions.
• No guidance is given as to what is a good acceptable rate of return.

Question 3

Advantages of payback

Answer 3

• Easy to understand and calculate.
• Favours quick return projects which may produce faster growth for the business.

Question 4

Disadvantages of payback

Answer 4

• Does not measure profitability, only cash flow.
• Ignores cash inflow after the payback period.