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Question 1
Question
What is the accounting rate of return?
Answer
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the rate of return given at the end of the accounting period
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the ratio of the accounting profit to the investment in the project
Question 2
Question
What is the formula?
Answer
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Profit / Income X 100
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Profit for the year / Asset book value at the start of the year X 100
Question 3
Question
What are the limitations of the accounting rate of return?
Answer
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It is the most favored method for investment appraisal
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Fails to take in to account the time value of money
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Profit figures are poor substitutes of cash flow
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The number of alternative ARR calculations can be continued beyond the three possibilities
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This method is more accurate and reliable in comparison to NPV
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