What are the advantages and disadvantages of accounting rate of return (ARR)?
Disadvantages of ARR
The measure is not a ‘true’ reflection of return.
Time value of money is ignored.
Ad hoc determination of target average return.
Uses profit and book value instead of cash flow and market value.
Advantages of ARR
Easy to calculate and understand.
Considers all profits of the project.
Time value of money is ignored.
Ad hoc determination of target average return.
Uses profit and book value instead of cash flow and market value.
Advantages of ARR
Easy to calculate and understand.
Considers all profits of the project.
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