ARR method will accept those projects whose ARR is higher than that set by management or bank rate and it will give highest ranking to ventures with highest ARR and vice versa.
1. Simple to understand and use.
2. Readily computed from accounting data thus much easier to ascertain.
3. It is consistent with profitability objectives as it analyses the return from entire inflows and as such it will give a clue or a hint to the profitability of venture.
1. It ignores time value of money.
2. It does not consider how soon the investment should recover the cost (it is owner looking than creditor oriented approach).
3. It uses accounting profits instead of cash inflows some of which may not be realisable.