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
Sunk Cost This is a cost which has already been incurred and cannot be affected through present or future decisions.

State the Significance of the Cost of Capital It must be recognized at the outset that cost of capital is one of the most difficult and disputed topics in the finance theory.

What is Average Collection Period Ratio? Please provide me report on Average Collection Period Ratio.

•?Detailed information should form the part of your answer (Word limit 150 to 200 words). Case let 1 This case provides the opportunity to match financing alternatives with the nee


I just purchased a stock that would pay the dividends of the first four years as D1 = $0.65, D2 = $0.74, D3 = $0.79, D4 = $0.84. I also told that the dividends would grow continual


1. Of course a swaption will be needed. The major reasons being that Bond A is callable after 3 years and matures in 4 years whereas Bond B matures in 5 years. It is understandable

Goal of Shareholders wealth maximisation Shareholders' wealth maximisation goal gives us the best results since effectsof all the decisions taken by company and its managers ar

explain the significance of operating leverage and financial with the help of example?