Accounting Rate of Return

Accounting Rate of Return

Under this method the average profit is divided by the average investment. The results then compared with the expected result and if the results meet the expectation then project is accepted.

Formula for Accounting Rate of Return

= Average Profit/Average Investment

Average Investment =(Initial Investment + Residual Value)/2

Advantages of Accounting Rate of Return

1. Easy to Calculate

This method is based on profit therefore it is easy to calculate and understand. This method does not require any special skill for calculating the result under this method.

2. More Reliable

This method is based on financial statement therefore can be relied.

3.Cost Saving

Financial manager can easily calculate the result under this methods therefore no special consultant or financial expert is required. Therefore heavy cost of such consultant may be saved.

Disadvantages of Accounting Rate of Return

1.Manipulation of Profit

As the profit can be manipulated therefore the results under this method can also be manipulated.

2. Different Results

As the profit can be calculated in different way therefore the result under this method may vary .

3. Time Value is ignored

Time value is ignored under this method.

4. Little Light on investment

This method put little information the timing of investment.

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