The accounting rate of return (ARR) is a way of comparing the profits you expect to make from an investment to the amount you need to invest. Show
The ARR is normally calculated as the average annual profit you expect over the life of an investment project, compared with the average amount of capital invested. For example, if a project requires an average investment of £100,000 and is expected to produce an average annual profit of £15,000, the ARR would be 15 per cent. The ARR is widely used to provide a rough guide to how attractive an investment is. The main advantage is that it is easy to understand. The higher the ARR, the more attractive the investment is. Disadvantages of the accounting rate of returnPoints for consideration when using the accounting rate of return are:
Which of the following is not an advantage of the average rate of return method? a.includes the amount of income earned over the entire life of the proposal b.takes into consideration the time value of money c.emphasizes accounting income d.easy to use Expert Solution  Students who’ve seen this question also like: Related Accounting Q&AFind answers to questions asked by students like you. Q: Which of the following facilitates the comparison of financial performance with one period to… A: Financial performance can be compared if the business uses same policies and methods in all the… Q: Explain the income & expenditure and Receipts & payment? Draw the format with example? 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The lack of adjustment of the time value of money makes ARR an inappropriate process to evaluate investments.
What are the disadvantages of using ARR?Disadvantages of the accounting rate of return
Unlike other methods of investment appraisal, the ARR is based on profits rather than cashflow. It is affected by subjective, non-cash items such as the rate of depreciation you use to calculate profits. The ARR also fails to take into account the timing of profits.
Which of the following is not an advantage of the internal rate of return method?Disadvantage: Ignores Size of Project
A disadvantage of using the IRR method is that it does not account for the project size when comparing projects. Cash flows are simply compared to the amount of capital outlay generating those cash flows.
What are the advantages of ARR method?Using ARR will enable the investors to decide on viability and profitability of capital projects to be undertaken. It also helps investors analyse the risk involved in the investments and conclude if the investment would yield enough earnings to cover the risk level.
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Which of the following is not an advantage of the accounting rate of return ARR method of investment?
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