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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Methods of evaluating capital investment proposals that ignore present value include:
A. Average rate of return
B. Cash payback
C. Both A and B
D. Neither A nor B

To determine

Concept Introduction:

ARR:

Accounting Rate of Return (ARR) is the rate of return earned on the investment made in a project. ARR is calculated by dividing the Average Accounting profits by Average Investment.

The formula to calculate ARR is as follows:

  ARR= Average Accounting profitsAverage Investment

Payback Period:

Payback period is the period in which the project recovers its initial cost of the investment. It can be calculated by dividing the initial investment by the annual cash inflow from the project.

To choose:

The method of evaluation of capital investment proposals that ignore present value

Answer

C. Both A and B

Explanation

Explanation for correct answer:

Both the Average rate of return and Cash Payback methods ignore present value for evaluation of capital investment proposals. Hence the correct option is C.

Explanation for incorrect answers:

A. Both the Average rate of return and Cash Payback methods ignore present value for evaluation of capital investment proposals. Hence this option is incorrect.

B. Both the Average rate of return and Cash Payback methods ignore present value for evaluation of capital investment proposals. Hence this option is incorrect.

D. Both the Average rate of return and Cash Payback methods ignore present value for evaluation of capital investment proposals. Hence this option is incorrect.

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