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Hi guys, i need urgently some help with this question Explain the benefits and drawbacks of using either ARR (Accounting Rate of Return) or PP (Payment Period) instead of NPV (Net Present Value) as a measure
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23 votes
23 votes
Hi guys, i need urgently some help with this question

Explain the benefits and drawbacks of using either ARR (Accounting Rate of Return)
or PP (Payment Period) instead of NPV (Net Present Value) as a measure of Return
on Investment when considering alternative capital projects?

User Leminhnguyen
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1 Answer

12 votes
12 votes

Answer:

Accounting rate of return, also known as the Average rate of return, or ARR is a financial ratio used in capital budgeting. The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return. Say, if ARR = 7%, then it means that the project is expected to earn seven cents out of each dollar invested (yearly). If the ARR is equal to or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investments, the higher the ARR, the more attractive the investment. More than half of large firms calculate ARR when appraising projects.

Step-by-step explanation:

hope this helps

User Anshul Kataria
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