Accounting or average rate of return , Financial Management

I need a report on Accounting or Average Rate of Return. Can you please assist me for Accounting or Average Rate of Return report for about 2500 words?

Posted Date: 2/14/2013 12:51:30 AM | Location : United States





Accounting or Average Rate of Return

Average accounting return, also termed as accounting rate of return or ARR, is an accounting method utilized for the purposes of comparison with other capital budgeting calculations, like NPV, PB period and IRR.

ARR gives a quick estimate of a project''s worth over its useful life. ARR is computed by finding a capital investment''s average operating profits before interest and taxes but after depreciation and amortization (also known as "EBIT") and dividing that number by the book value of the average amount invested. It can be illustrated as the following:

ARR = Average Profit / Average Investment

The result is expressed in percentage. In other words, ARR compares the amount invested to the profits earned over the course of life of a project. The higher the ARR, the better the life of project.

The main disadvantages of ARR are as follows:

1. It employs operating profit rather than cash flows. A number of capital investments have high upkeep and maintenance costs that bring down profit levels.

2. Not like NPV and IRR, it does not account for the time value of money. Through ignoring the time value of money, the capital investment under consideration will appear to attain a higher level of return than what will take place in reality. The capital investment may appear to be more lucrative than the alternatives, like investing in the financial markets, when it is actually less lucrative.

Here is a simple instance of an ARR calculation: A project requiring an average investment of $1,000,000 and generating an average annual profit of $150,000 would have an ARR of 15%.
Whereas ARR is easy to calculate and can be used to gauge the results of other capital budgeting calculations, it is not the most accurate metric.

Posted by Diana | Posted Date: 2/14/2013 12:52:37 AM


Related Discussions:- Accounting or average rate of return , Assignment Help, Ask Question on Accounting or average rate of return , Get Answer, Expert's Help, Accounting or average rate of return Discussions

Write discussion on Accounting or average rate of return
Your posts are moderated
Related Questions
This case provides the opportunity to match financing alternatives with the needs of different companies. It allows the reader to demonstrate a familiarity with different types

Q. What do you mean by Gross working capital? Gross working capital: - Gross working capital demotes to firms investment in current assets. Current assets are the assets which

evaluation and maintenance of MIS

using the operating cycle and any other financial management knoweledge,dicuss the applicability of such a cycle to the poultry biussiness in uganda (consider broilers)

Illustrate the in brokered markets according to trade intermediation. In brokered markets: In brokered markets, brokers execute an active search function to match buyers and

Report based on Capital Investment Plans   To analyze the capital investment plans of Hatsun Agro Products Limited (HAPL) we shall look at the capital expenditure of HAPL in

What is the Modigliani-Miller's irrelevance hypothesis in dividend decision making? Critically evaluate its assumption.

How does a preemptive right protect the interests of existing stockholders? A preemptive right defends the interests of existing stockholders by providing them the opportunity to

1.      Consider the following two investment alternatives   Net cash flow   End of year Machine A Machine

How does continuous compounding benefit an investor? The effect of enhancing the number of compounding periods per year is to increase the future value of the investment.  The