   Chapter 15, Problem 3CDQ

Chapter
Section
Textbook Problem

Why would the average rate of return differ fromthe internal rate of return on the same project?

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

Hence, higher the ARR better it is. A project with the Higher ARR is chosen first in the capital rationing process.

IRR:

Internal Rate of Return (IRR) is the rate at which the NPV of the project is 0 or we can say that IRR is the rate of return at which the project is at breakeven. IRR is calculated using excel or approximation method.

To Indicate:

The difference between the Average rate or return and internal rate of return

Explanation

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...

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