The accounting rate of return (ARR) is a financial metric used to evaluate the profitability of an investment or project. It is calculated by dividing the expected annual net income from the investment by the initial investment cost. The resulting percentage represents the ARR, which is used to determine whether the investment is worthwhile.

There are several advantages to using the ARR as a decision-making tool. One advantage is that it is easy to calculate and understand, making it a useful tool for both financial analysts and non-financial managers. It also takes into account the time value of money, as the expected net income is divided by the initial investment cost. This allows the ARR to consider the opportunity cost of the investment, as the invested funds could be used elsewhere to generate a return.

However, the ARR also has several disadvantages. One major disadvantage is that it only considers the expected net income of the investment, and does not take into account the risk associated with the investment. This means that an investment with a high ARR may still be risky, and may not actually generate the expected return. Additionally, the ARR only considers the initial investment cost, and does not take into account any ongoing costs or expenses associated with the investment. This can lead to a distorted view of the profitability of the investment, as these ongoing costs can significantly impact the overall return.

Another disadvantage of the ARR is that it does not consider the length of the investment period. This means that an investment with a long payback period may still have a high ARR, even if it takes a long time to recoup the initial investment. This can make it difficult to compare investments with different payback periods, as the ARR does not provide a consistent measure of profitability.

Overall, the ARR is a useful tool for evaluating the profitability of an investment, but it has several limitations that should be considered. It is important to consider other factors, such as risk and ongoing costs, when making investment decisions, as these can significantly impact the overall return on an investment.

## Advantages and Disadvantages of Internal Rate of Return (IRR)

Why are Roi and accounting rate of return different? The IRR method will give a percentage interpretation value, but that is insufficient. The higher the ARR, the more attractive the investment is. This will be the revenue remaining, after all, operating expenses, taxes, and interest associated with implementing the investment or project have been deducted. Besides, it is an essential and less demanding approach to compute and see by utilizing ARR strategy; it can be assessed rapidly on the recognition that would enable firms to exploit open doors quickly. This method ignores time factor. Thus, this method establishes the ratio between the average annual profits and total outlay of the project. So how useful is this method? Global accounting convergence and the potential adoption of IFRS by the US Part I : Conceptual underpinnings and economic analysis.

## (PDF) Advantage and disadvantages of the different capital budgeting techniques

Projects which yield the highest earnings are selected and others are ruled out. The machinery is estimated to have a useful life of 20 years, with no salvage value. The main advantage is that it is easy to understand. Does Not Account for Time-Based Risk There is no consideration of the increased risk in the variability of forecasts that arises over a long period of time. The local college purchase will cost £500,000 and a further £300,000 to make the premises sexy Cashflow profits ie not including depreciation from the college over the next 5 years are expected to be: Year Cash Profits £ 1 100,000 2 120,000 3 180,000 4 250,000 5 350,000 The sexiness of the premises will have disappeared by the end of the 5 years and so sadly have a zero resale value. What are two advantages of net present value? This can then consider potential money stream problems and risks and the general net money stream.