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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The time value of money is ignored by the payback period and the ARR. Explain why this is a major deficiency in these two models.

To determine

Explain that the ignorance of time value of money is a major deficiency in payback period and ARR.

Explanation

Payback Period:

The time taken by an investment to recover its original value is known as payback period. It is calculated by dividing the original amount of investment by annual cash flow from the investment.

Accounting Rate of Return:

A method that measures returns from an investment in terms of income instead of cash flow is known as accounting rate of return...

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