ACCOUNTING RATE OF RETURN (ARR)
This method takes into account the earnings expected from the investment over their whole life. It is also known as Rate of return method. The project with the higher rate of return is selected as compared to the one with a lower rate of return.
MERITS OF ACCOUNTING RATE OF RETURN (ARR)
- It is easy to calculate and simple to understand.
- It is based on the accounting information rather than cash inflows.
- It considers the total benefits associated with the project.
- It isn’t based on the time value of money.
DEMERITS OF ACCOUNTING RATE OF RETURN (ARR)
- It ignores the re-investment potential of a project.
- It ignores the time value of money.
- Different methods are used for accounting profit, so it leads to some difficulties in the calculation of project.
ACCEPT AND REJECT CRITERIA FOR ARR METHOD
If the actual Accounting Rate of Return is more than the pre-determined required rate of return then the project is accepted, if not it would be rejected.