Question

All of the following are disadvantages of using the average rate of return except:____________.

a. the average rate of return method does not consider the timing of the expected cash flows.
b. the average rate of return method does not use present values.
c. the average rate of return method includes the entire amount of income earned over the life of the proposal.
d. the average rate of return method does not directly consider the expected cash flows from the proposal.

Answer 1

c. the average rate of return method includes the entire amount of income earned over the life of the proposal.

Step-by-step explanation:

the average rate of return is a capital budgeting method.

Average rate of return = Average net income / Average book value

Average book value = (cost of equipment - salvage value) / 2

From the above formula, it can be seen that the entire income earned over the life of the project is used when calculating average rate of return.

the average rate of return method does not consider the timing of the expected cash flows. or use present values unlike the net present value and internal rate of return.

Net income is used instead of expected cash flows when calculating ARR