Advantages Of Accounting Rate Of Return (ARR)
Main benefits or advantages of accounting rate of return method of evaluating investment proposals can be studied as follows:
1. Simple Method
Accounting rate of return (ARR) is simple and widely used technique of comparing capital projects which can be understood easily by everyone.
2. Easy Calculation
It is very easy to calculate ARR of different projects. It can be determined by using simple formula which is given below.
Accounting Rate Of Return (ARR) = (Average Net Income/Average Investment) x 100
3. Simple Decision Rules
It is easy to take decision regarding the suitable capital project. Project with higher ARR is selected and project with lower ARR is ignored.
Also Read:
Also Read:
4. Measures Profitability
ARR measures the profitability of a project which is beneficial for shareholders and owners.
Disadvantages Of Accounting Rate Of Return (ARR)
Main drawbacks or limitations of ARR can be studied as follows:
1. Ignores Time Factors
Accounting rate of return method does not consider time value of money. So, it is unscientific method of comparing capital projects.
2. Ignores Cashflow
ARR is calculated on the basis of profit earned by the project. It ignores cash-flows which is very important factor for every business.
3. Ignores Terminal Value
ARR ignores the terminal value of the project which is important in accounting.
