Question

What are the disadvantages of the accounting rate-of-return approach to project evaluation?

Answer 1

The disadvantages of the accounting rate-of-return approach to project evaluation include subjectivity, ignoring the time value of money, and not considering risk.

Step-by-step explanation:

The disadvantages of the accounting rate-of-return approach to project evaluation are:

1. Subjectivity: The accounting rate-of-return approach relies on subjective business judgement to determine the rate of return. This can lead to biased decisions and inaccurate evaluations.
2. Ignoring the time value of money: The accounting rate-of-return approach does not take into account the time value of money, which is the concept that money received in the future is less valuable than money received today. This can lead to incorrect project evaluations.
3. Does not consider risk: The accounting rate-of-return approach does not consider the risk associated with an investment. It only focuses on the accounting figures and ignores factors that may affect the project's profitability and viability.