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ARR is based on accounting profits expressed net of deduction for depreciation provisions, rather than cash flows. This effectively results in double-counting for the initial outlay ie, the capital cost is allowed for twice over, both in the numerator of the ARR calculation and also in the
denominatorsir i didnt not understand how is capital cost allowed twice ?can u plz explain
I have no idea where you read this, but it is a rather meaningless comment (even if it was from the examiner!!) 🙂
ARR is an accounting measure and as such the profit is the accounting profit which is after depreciation.
The average investment depends on the values in the SOFP which also are reduced by the depreciation in line with accounting conventions.
In that sense depreciation is dealt with twice, but it is not really double-counting.
Everything needed for the exam on this (and on everything else) is covered in my free lectures.
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