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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 ARR has one specific advantage not possessed by the payback period in that it

  1. a. considers the time value of money.
  2. b. measures the value added by a project.
  3. c. is always an accurate measure of profitability.
  4. d. is more widely accepted by financial managers.
  5. e. considers the profitability of a project beyond the payback period.

To determine

Identify the advantage of ARR which is not possessed by payback method.

Explanation

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. It is a non-discounting model of capital investment decision.

e.

ARR is more accurate than payback period because it considers the income from a project beyond the payback period. ARR focuses on profitability that is not considered by payback period. Therefore, option e is the correct answer.

a.

ARR is a non-discounting method, which does not consider the time value of money...

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