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
type of assets for ppt from t.y.bom com student in commerce department in financial management

Foreign Exchange Market Equilibrium: We say that the foreign exchange market is in equilibrium when deposits of all currencies o er the same expected rate of return (when retu

Q. Explain about Invoice discounting? Invoice discounting is a technique which is able to be used to raise finance against receivables. Invoice discounting works as follows:

Describe the major factors contributing to effective cash management in a firm.  Why is the cash management process more difficult in a MNC? An effective cash management system s

What is Rationale and behind profitability maximisation Rationale & behind profitability maximisation, as a guide to financial decision making, is simple. Profit is a test of e

What is the relationship between a bond's market price and its promised yield to maturity?  Explain. A bond's market price relies on its yield to maturity abbreviated as YTM.  Wh

The following are extracts of the Income Statement and Balance Sheet for Umar plc. Extract Balance Sheet at 30 June 20X2               20X1 £'000  £'000                £

Several overseas factors are subsidiaries of UK banks or their agents who offer facilities to companies with export credit sales usually of above £0.25m. Overseas factors carry out


Peter Drucker gave five rules for acquisitions to be more successful. Contribution e.g. the acquirer can add value to the target organisation other than just providing mone