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 profits are shown below. All three 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 operating profits over the five years.

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Project A Project B Project C Time Immediately 000 000 000 Cost of machine (160) (160) (160) 1 year's time Operating profit after depreciation 20 10 160 2 years' time Operating profit after depreciation 40 10 10 3 years' time Operating profit after depreciation 60 10 10 4 years' time Operating profit after depreciation 60 10 10 5 years' time Operating profit after depreciation 20 160 10