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