Accounting Rate of Return is calculated using the following formula: Average accounting profit is the arithmetic mean of accounting income expected to be earned during each year of the project's life time. Average investment may be calculated as the sum of the beginning and ending book value of the project divided by 2. Having said that, Accounting rate of return as one of the investment appraisal techniques is a percentage measuring the average annual operating profit against the average investment. To get the required rate of return, we need to use the formula for ARR or Accounting Rate of Return below: Solution NPW = 0 at the rate of return 0 = -3,100 + 700(P/A, i, 5) (P/A, i, 5) = 4.4286 (P/A, 4%, 5) = 4.452 (P/A, 4½%, 5) = 4.390 4% < i < 4½% ∴ interpolate i = 4.2% 7-11 An investment that cost $1,000 is sold five years later for $1,261. What is the nominal rate of return on the investment if interest is compounded annually? Solution The accounting rate of return, also known as the return on investment, gives the annual accounting profits arising from an investment as a percentage of the investment made. As we can see from this, the accounting rate of return, unlike investment appraisal methods such as net present value, considers profits, not cash flows. In fact, NPV is positive in between the two rates i.e. 25% and 400%. The number of rates of return depends on the number of times the sign of cash flow changes. In the above project, there are two reversals of sign (-+-) and we have two rates of return. The result of the calculation is expressed as a percentage. Thus, if a company projects that it will earn an average annual profit of $70,000 on an initial investment of $1,000,000, then the project has an accounting rate of return of 7%. There are several serious problems with this concept, The Accounting Rate of Return (ARR) is the ratio of the average after tax profit divided by the average investment. Substit uting the values given in the above mentioned formula we get: Therefore, the new printing equipment is expected to generate net income percentage of relative to the investment made in the project.

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Having said that, Accounting rate of return as one of the investment appraisal techniques is a percentage measuring the average annual operating profit against the average investment. To get the required rate of return, we need to use the formula for ARR or Accounting Rate of Return below: Such a rate is termed as Accounting rate of return. It may be calculated according to the following methods: ARR = Annual average net earnings after taxes X 100 Average investment over the life of the project ARR = Annual average net earnings after taxes X 100 Original Investment.

(a)Explain and comment on the problems of measuring performance in a not-for- profit (iii)return on capital employed (accounting rate of return) based on initial  

Internal rate of return is the discount rate which reduces the net present value of an investment project exactly to zero. (Ministry of Overseas Development,. 1977)   Return on sales % = NPAT / Sales (amounts). • Asset turnover = Sales NB: by multiplying the above 3 ratios we obtain the return on equity (A) Accounting Rate of Return. (B) Payback project increases, due to difficulties in looking into the  This paper explores the direct solution of the IRR using the roots of polynomials. Direct computation is feasible in three cases: two cash flows during an N-year  Net present value vs internal rate of return One problem which plagues developing countries is "inflation rates" which can, in some cases, exceed 100% per  Problem 1: On the basis of expected Rate, Standard Deviation, Variance and Coefficient of variation decided which of the following company is best for  Here we discuss how to calculate Average Rate of Return and its formula along with You can learn more about Accounting from the following articles –. 24 Sep 2019 Accounting rate of return is an accounting technique to measure profit expected from an investment. It expresses the net accounting profit arising 

of the internal rate of return (IRR), measurement problems are very common in accounting rate of return (ARR) rather than the IRR to assess the give different answers for two businesses that are alike in every respect except that.

Required: Using accounting rate of return method, select the best investment proposal for the company. Solution: If only accounting rate of return is considered, the proposal B is the best proposal for Good Year manufacturing company because its expected accounting rate of return is the highest among three proposals. Advantages and disadvantages:

Here we discuss how to calculate Average Rate of Return and its formula along with You can learn more about Accounting from the following articles –.

ity, such as the Net Present Value (NPV) and Internal Rate of Return (IRR) methods. Since the capital budgeting rationing problem involves discrete pro- solution for every project, 2) maintain risk-equivalence so that it may be Payback,10 accounting rate of return, IRR and the profitability ratio all give the manager. (a)Explain and comment on the problems of measuring performance in a not-for- profit (iii)return on capital employed (accounting rate of return) based on initial   Rational valuation formula (RVF) and time variability in asset rates of return the importance of accounting information in differences between value and price. or cases: production (Ball & Croushore, 2003); to solve the problem of infinite 1967); in the method for the numerical solution of the heat transfer equation (Dew   Solution Annual Depreciation = (Initial Investment − Scrap Value) ÷ Useful Life in Years Annual Depreciation = ($130,000 − $10,500) ÷ 6 ≈ $19,917 Average Accounting Income = $32,000 − $19,917 = $12,083 Accounting Rate of Return = $12,083 ÷ $130,000 ≈ 9.3% Example 2: Compare the following two mutually

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