advantages and disadvantages of accounting rate of return pdf

Advantages And Disadvantages Of Accounting Rate Of Return Pdf

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The advantages and disadvantages of the internal rate of return are important to understand before applying this technique to specific projects. There must be a proper analysis conducted and an interpretation of most projects by this well-known technique of evaluation and selection of investment projects. This technique has certain limitations in analyzing certain special kinds of projects, such as mutually exclusive projects, an unconventional set of cash flows, different project lives, etc.

According to this method, capital projects are ranked in order of earnings. Projects which yield the highest earnings are selected and others are ruled out. The Accounting return on investment method can be expressed in several ways as follows:.

Advantages and Disadvantages of Accounting Rate of Return Method

The average accounting return method of evaluating business investments is based on using the accounting rate of return for a specified number of years to arrive at an average rate of return for the period. Typically, the average accounting return method is used as a tool for comparing potential profitability of two or more investment opportunities. Like most analytical tools, using this comparison method comes with its share of pros and cons. The accounting rate of return is calculated by subtracting depreciation from the total cash flow, then dividing the result of that calculation by the initial investment. ARR gives an indication of the expected rate of return from the initial investment made on the project. The result is used to arrive at the average accounting return rate; the accounting rate of return for each year is added together then divided by the number of years included in the calculation.

The Pros & Cons of the Average Accounting Return Method

Post a Comment. Know The Benefits And Drawbacks. Main benefits or advantages of accounting rate of return method of evaluating investment proposals can be studied as follows:. Accounting rate of return ARR is simple and widely used technique of comparing capital projects which can be understood easily by everyone. It is very easy to calculate ARR of different projects. It can be determined by using simple formula which is given below. It is easy to take decision regarding the suitable capital project.

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. 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. 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.

Business investment projects need to earn a satisfactory rate of return if they are to justify their allocation of scarce capital. The average rate of return "ARR" method of investment appraisal looks at the total accounting return for a project to see if it meets the target return. The ARR for the project is The project looks like it is worth pursuing, assuming that the projected revenues and costs are realistic. A key question is - how does this return compare with the target return for investments by this business?

Accounting Rate of Return (ARR) Method | Advantages | Disadvantages

Projects that are earning the highest are chosen while those which are not performing up to the standard are discarded. The ARR is further sub-divided into average rate of return, average investment, and earnings per division. With the ARR method, the online cheap accountants in east London calculates the average profit that is made. The average rate of return method thus takes into consideration, specific assets earnings in its entire financial run. A project will get approved only if its return percentage is higher.

The following are the advantages of Accounting Rate of Return method. It is very easy to calculate and simple to understand like pay back period. It considers the total profits or savings over the entire period of economic life of the project. This method recognizes the concept of net earnings i.

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2 Comments

  1. Emperatriz V.

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    10.05.2021 at 03:13 Reply
  2. Mercedes C.

    If you have already studied other capital budgeting methods net present value method , internal rate of return method and payback method , you may have noticed that all these methods focus on cash flows.

    18.05.2021 at 14:11 Reply

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