Accounts drawn up at the end of a trading period that have been approved by an independent, external accounting practice. It is important to note when accounts have not been audited (6-monthly, or interim accounts), but also to acknowledge that some remarkable accounting scandals have been fully audited, i.e. the process is far from a guarantee of the validity of the published data.
This method of investment appraisal seems easy to understand, but often trips students up in exams. ARR is average annual profit as a percentage of the sum invested into a project. The maths can be tricky to calculate, but even more important is the ability to interpret an ARR result. A figure of 20%, for instance, would mean an annual profit of 20% on your investment. This is terrific at a time when interest rates are more like 2–3% a year.
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