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.