What is the accounting rate of return?
the rate of return given at the end of the accounting period
the ratio of the accounting profit to the investment in the project
What is the formula?
Profit / Income X 100
Profit for the year / Asset book value at the start of the year X 100
What are the limitations of the accounting rate of return?
It is the most favored method for investment appraisal
Fails to take in to account the time value of money
Profit figures are poor substitutes of cash flow
The number of alternative ARR calculations can be continued beyond the three possibilities
This method is more accurate and reliable in comparison to NPV
