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Capital Investment Decisions pt.2

Capital Investment Decisions pt.2. ARR and PPP. Recall the ARR Calculation…. Before analyzing the ARR Rule, consider a second example:. Appeal of ARR. Comparable to ROCE Return on Capital Employed (ROCE) often used to measure performance of business. Problems with ARR.

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Capital Investment Decisions pt.2

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  1. Capital Investment Decisions pt.2 ARR and PPP

  2. Recall the ARR Calculation…

  3. Before analyzing the ARR Rule, consider a second example:

  4. Appeal of ARR • Comparable to ROCE • Return on Capital Employed (ROCE) often used to measure performance of business

  5. Problems with ARR • No value placed on time • Use of accounting profit instead of cash flow • Ignores scale (size), as do all return-based criteria

  6. What about time?

  7. Answer: Time is ignored.

  8. Example 2: Ignoring time and using accounting data on the investment. In this example, the boss rejects the project because he/she has a required rate of return of at least 27%!

  9. So, how to lose money but get the project accepted?

  10. ARR and Investment Scale (size)

  11. ARR and Scale (cont.)

  12. The Payback Period (PP) • The Payback Period is simply the amount of time required to recoup (get back) the original investment. • The Payback Period Rule (PP) says to accept investment projects if the payback period is “short enough”.

  13. Example of Calculating the Payback Period (PP)

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