Define assessing investment opportunities

Reference no: EM131437320

Question: ARR suffers from a very major defect as a means of assessing investment opportunities. Can you reason out what this is? Consider the three competing projects whose cash flows are shown below. All three of these involve investment in a machine that is expected to have no residual value at the end of the five years. Note that all of the projects have the same total net profits over the five years.

Project

A B C

Time £000 £000 £000

Immediately Cost of machine (160) (160) (160)

1 year's time Net profit after depreciation 20 10 160

2 year's time Net profit after depreciation 40 10 10

3 year's time Net profit after depreciation 60 10 10

4 year's time Net profit after depreciation 60 10 10

5 year's time Net profit after depreciation 20 160 10

Reference no: EM131437320

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