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Accounting Rate of Return or Average Rate of Return Method Of Capital Budgeting And Evaluation

Accounting Rate of Return or Average Rate of Return Method Of Capital Budgeting And Evaluation:

Average rate of return means the average rate of return or profit taken for considering the project evaluation. This method is one of the traditional methods for evaluating the project proposals:

Merits Of Accounting Rate of Return or Average Rate of Return Method Of Capital Budgeting And Evaluation:

1. It is easy to calculate and simple to understand.

2. It is based on the accounting information rather than cash inflow.

3. It is not based on the time value of money.

4. It considers the total benefits associated with the project.

finance
[Post Image Courtesy of Sira Anamwong at FreeDigitalPhotos.net]

Demerits Of Accounting Rate of Return or Average Rate of Return Method Of Capital Budgeting And Evaluation:

1. It ignores the time value of money.

2. It ignores the reinvestment potential of a project.

3. Different methods are used for accounting profit. So, it leads to some difficulties in the calculation of the project.

Accept/Reject criteria For Accounting Rate of Return or Average Rate of Return Method Of Capital Budgeting And Evaluation:

If the actual accounting rate of return is more than the predetermined required rate of return, the project would be accepted. If not it would be rejected.

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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