Question

The accounting rate of return method for evaluating proposed investments:

A. is based on cash receipts and disbursements related to the investment.
B. uses accounting net income from the operating budget.
C. does not recognize the time value of money.
D. is easier to use than the net present value method.

Answer 1

The accounting rate of return method evaluates investments using accounting net income, ignores the time value of money, and is considered easier to use than the net present value method.

Step-by-step explanation:

The accounting rate of return method for evaluating proposed investments uses accounting net income from the operating budget. This method does not take into account the time value of money as it focuses on the accounting profits rather than cash flows.

However, when compared to the net present value method, many find the accounting rate of return easier to use because it is based on accounting information rather than projected cash flows and discounted calculations.