Page 9 - CIMA MCS Workbook November 2018 - Day 1 Suggested Solutions
P. 9
SUGGESTED SOLUTIONS
Return on capital employed / accounting rate of return (ARR)
ARR is a measure of the profitability of a project using accounting profits rather than the cash
flows used by the other methods. It is easy to understand and commonly used.
The use of profits over cash flows means that it is a more subjective measure, dependent on
accounting policies. It can also be calculated using either initial capital or average capital over the
life of the project, so comparisons to other projects/ businesses can be made more difficult.
Overall, the company should use methods of investment appraisal that lead to the best decisions
being made by management. Usually this would mean using NPV calculations, but with its low
cash reserves, payback is also a useful tool for Grapple.
KAPLAN PUBLISHING 59
