Asked by Blake Waldman on Jul 14, 2024
Verified
What is one advantage and one disadvantage of using the accounting rate of return to evaluate investment alternatives?
Accounting Rate of Return
This measures the return on investment by dividing the average annual profit by the initial investment cost, often used for evaluating the profitability of potential investments.
- Pinpoint and explain the assorted methods used in capital budgeting, such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and the Profitability Index.
- Assess the benefits and drawbacks of various methods for capital investment analysis.
Verified Answer
DM
Didier MonterrozaJul 15, 2024
Final Answer :
Advantages of using the accounting rate of return on the average investment are that it is easy to understand and it allows comparison of projects.One disadvantage of this method is that when net incomes vary from year to year,the ARR will also vary across years,making the project seem desirable in one year and not another.A second disadvantage is that it ignores the time value of money.
Either advantage and disadvantage is acceptable,in any order.
Either advantage and disadvantage is acceptable,in any order.
Learning Objectives
- Pinpoint and explain the assorted methods used in capital budgeting, such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, and the Profitability Index.
- Assess the benefits and drawbacks of various methods for capital investment analysis.
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