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Investment Appraisal
Quick questions on Accounting rate of return and IRR explained: H2 Principles of Accounting
5short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What is the accounting rate of return?Show answer
The ARR expresses the average annual accounting profit as a percentage of the investment. The common version uses average investment:
What is the internal rate of return?Show answer
The IRR is the discount rate at which a project's NPV is exactly zero. It is the project's own rate of return, the highest cost of capital the project can sustain and still be worthwhile. Unlike the ARR, the IRR is based on discounted cash flows, so it does account for timing.
What is q1?Show answer
Average annual profit is \24\,000\. Find the ARR. [2 marks]
What is q2?Show answer
A project's NPV is +\5\,00010\%-\ at . Estimate the IRR. [3 marks]
What is q3?Show answer
State the decision rule for the IRR and explain it. [2 marks]
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