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Rob's e2700 Notes

🔎 Accounting Rate of Return

In general, we don’t like ARR because it doesn’t respect the time value of money. Therefore, we won’t spend much time on it.

To some degree, this slide is here to remind us that it is important to account for the Time Value of Money. See the video accompanying the following page for more: [Two measures of profit - Cash Flow vs. Net Income]() 🔗

Accounting Rate of Return

ARR comes down to two equations:

ARR=Average  profits  after  taxesAverage  investmentARR=\frac{Average \;profits \;after \;taxes}{Average \;investment} Average  profits  after  taxes=Average  annual  operating  cash  inflows−Average  annual  depreciationAverage \;profits \;after \;taxes=Average \;annual \;operating \;cash \;inflows- Average \;annual \;depreciation

Plug and chug: (help)

  1. Equation →
  2. Plug 🔌 →
  3. Solve 🚂 →
  4. 🧠 →

Simplest Example:

❔ What was Apple’s ARR. Assume that Average Annual Deprec. is 10,000M10,000M. You have the opportunity to lease “Apple” for 3 years for and annual cost of 233B233B.

✔ Click here to view answer

Average  Profits  After  Taxes=Av  AnnOperating  Cash  Inflows−Av  Ann  Depreciation=102,288−11,148=91,140Average \;Profits \;After \;Taxes = Av \;Ann Operating \;Cash \;Inflows - Av \;Ann \;Depreciation = 102,288 - 11,148 = 91,140
ARR=Avg  Profit  Aft  Tax/Avg  Investment=91,140/233,000=0.3912ARR = Avg \;Profit \;Aft \;Tax / Avg \;Investment = 91,140 / 233,000 = 0.3912