Accounting Rate of Approach

Question 1

What is the accounting rate of return approach (ARR) defined?

Answer 1

Determines the expected annual incremental accounting net income from a project as a percent of the initial (or average) investment

Question 2

What is the ARR Formula?

Answer 2

Average annual incremental revenue - Average annual incremental expenses / Initial (average) investment

OR

AVERAGE NET INCOME / INITIAL INVESTMENT

Question 3

What are the advantages and disadvantages of ARR

Answer 3

• Easy to understanding
• Consistent with financial statement values
• Considers life and results of the project

Disadvantage:

• ignores time value of money
• uses nominal net income
• Accrual accounting NOT cash flow