Concept explainers
Average
Average rate of return is a method that measures the average earnings of a particular business, as a percentage of the average investment. It is also known as accounting rate of return.
Calculation of Average rate of return:
The principal objection to use the average rate of return method.
Explanation of Solution
The major objection for using the average rate of return method is as follows:
1. Average rate of return method doesn’t consider the expected cash flows from the investment proposals.
2. It also doesn’t consider the period (timing) of the expected cash flows.
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