Question

Which of the following is considered to be a redeeming feature of average accounting return analysis? Select one:

a. Calculation relies on net income and not cash flows or asset values.
b. Calculation relies on book values and not market values or cash flows.
c. It is relatively easy to calculate.
d. It incorporates time value of money.
e. Estimation of the appropriate cutoff rate is straightforward and easy.

Answer 1

The Average Accounting Return (AAR) analysis is praised for being relatively easy to calculate, which is considered its redeeming feature. It uses straightforward accounting profits, as opposed to more complex calculated cash flows or consideration of the time value of money. Option b

Step-by-step explanation:

The question centers around the concept of the Average Accounting Return (AAR) analysis, which is a method used to make investment decisions based on accounting profits. Among the options provided, the correct answer is that c. It is relatively easy to calculate. This redeeming feature of AAR analysis makes it appealing to those looking for a straightforward method to evaluate investments.

Unlike other more complex valuation methods, AAR relies on accounting measures like net income and book values, rather than cash flows or market values, and does not consider the time value of money. However, it is important to note that this simplicity can also be a limitation because it may not provide an accurate reflection of an investment's potential profitability over time. Option b