Chapter 15, Problem 1CDQ

Chapter
Section
Textbook Problem

What are the principal objections to the use 01the average rate of return method in evaluatingcapital investment proposals?

To determine

Concept Introduction:

ARR:

Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.

The formula to calculate ARR is as follows:

ARR= Average Accounting profitsAverage Investment

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

To Indicate:

The principal objections in using the average rate of return method in evaluating the capital investment proposals

Explanation

Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.

The formula to calculate ARR is as follows:

ARR= Average Accounting profits

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