Advantages and disadvantages of accounting rate of return, Financial Management

Advantages of ARR:

  • It is simple to calculate and easy to catch.
  • With the help of this technique, direct comparisons among proposed projected of varying lives with no built-in-prejudice in favor of short-term ventures can be made.

Disadvantages of ARR :

  • This technique ignores time value of money.
  • It fails to shed light on yearly rate of return of the project. It may be possible for the project producing higher earnings in the early years to show a lower average rate of return and be rejected in support of other projects.
  • Serious errors can happen in selection of projects if corporate managers

Accept projects whose accounting rates are equivalent to the or above some arbitrarily selected cut-off rate, and they reject projects whose accounting rates fall short of the cut-off rate.

  • Accounting information is not appropriate for investment decision because it fails to differentiate between cash flowing in and out of the company and book keeping transactions.
  • There is no full agreement on the exact measure of the term investment.

Therefore, different managers have different meanings when they refer to ARR.

Posted Date: 10/15/2012 9:14:50 AM | Location : United States







Related Discussions:- Advantages and disadvantages of accounting rate of return, Assignment Help, Ask Question on Advantages and disadvantages of accounting rate of return, Get Answer, Expert's Help, Advantages and disadvantages of accounting rate of return Discussions

Write discussion on Advantages and disadvantages of accounting rate of return
Your posts are moderated
Related Questions
What are the advantages of “collecting early” and how do companies attempt to do this? Money has time value.  The sooner cash is collected, the better.  Companies employ regional


I need your assistance on how to group the relevant data so as to help me in the data analysis

Q. Explain Dividend Policy Decision? Dividend Policy Decision: - The financial management has to make a decision as which portion of the profits is to be distributed as dividen

Ratio Calculation:   A 'Financial Ratio' is an index that relates two accounting numbers and is obtained by dividing one number by the other. Various Ratios are - 1. L

After read all the available information carefully, prepare a two page (double-spaced) essay and answer the following questions: Assume that we have the following data: C=100+0.50Y

You have recently won the UniSA "log tossing" competition. The prize of $200 is supposed to be used to buy a 50-year subscription to "Log News" This appears to represent a consid

The collaterals used in the repo market are high quality securities; but they are also not free from credit risk. In our earlier example, we see the dealer borrow

Principles of Financial Accounting and Management 1. Define Accounting. Briefly explain the ‘Entity Concept' and ‘Money Measurement Concept' of accounting. 2. What is rectif

Documenting the accounting system There are 3 methods generally used to document the clients system. Narrative notes: Written description of the system Advantages:- C