Answers should identify and discuss the relevance of each key measure - it is very important that students
recognise that whilst B appears to be the best choice it is over a longer period and this increases
uncertainty. The differences between the two are slight, as recognised in the ARR and IRR, and this would
suggest the decision is highly sensitive to the discount rate applied.
Theoretical limitations discussed could include:
Cash based vs profit based measures
Complications of uneven cash flows
Difficultly in determining discount rates