Page 91 - 5.2 i. Manac Finance ITC Summarised Notes

CAPITAL INVESTMENT APPRAISAL

Accounting Rate of Return (ARR)

Accounting rate of return =

• Estimating the rate of return from an investment.

• Formula: Average annual profit / Average investment x 100

Advantages:

• Easy to calculate

• Information available from the income statement

Disadvantages:

• Profit used instead of cash flows (affected by different accounting

policies)

• Time value of money is not taken into account

91