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Candidates often confuse the ARR and IRR because they have similar letters in their acronyms. Both methods of investment appraisal
give a value in percentage terms, but the similarity ends there.
IRR is the discount rate which gives a net present value of zero for an investment project. The IRR method is a discounted cash flow
method that takes into account the time value of money; the calculated IRR is found by linear interpolation.
The ARR method uses average annual accounting profit, not cash flow, and calculates a percentage return on the capital invested in a
project. ARR is very similar to return on capital employed (ROCE) and the two terms (ARR and ROCE) are often used interchangeably
from an investment appraisal point of view.