Asked by ronak hindocha on Jul 04, 2024
Verified
Without using formulas, provide a definition of average accounting return (AAR) .
A) A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made.
B) A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment.
C) A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost.
D) A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost.
E) A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while PI less than 1 signify negative NPV projects.
Average Accounting Return
A financial ratio that represents the average annual income as a percentage of the initial investment, used in capital budgeting to estimate the profitability of potential investments.
Expected Profit
The anticipated return from an investment or business activity, considering probabilities of various outcomes.
- Learn the concept of average accounting return (AAR) and its application in measuring project profitability.
Verified Answer
AG
Ariella GarlandJul 05, 2024
Final Answer :
A
Explanation :
The Average Accounting Return (AAR) is a financial metric used to assess the profitability of an investment, calculated as the average annual profit (or return) divided by the initial investment or the average investment over the period. Choice A correctly describes AAR as a tool for measuring a project's acceptability by estimating the profit expected from an investment, without involving specific formulas or calculations related to time value of money, discounted cash flows, or net present value, which are mentioned in the other options.
Learning Objectives
- Learn the concept of average accounting return (AAR) and its application in measuring project profitability.