BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 1DQ
Textbook Problem

What are the principal objections to the use of the average rate of return method in evaluating capital investment proposals?

Expert Solution
To determine

Average Rate of Return:

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:

AverageRateofReturn}=(EstimatedAverageAnnualIncome)(AverageInvestment)×100

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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Chapter 26 Solutions

Accounting
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Ch. 26 - What are the major advantages of leasing a fixed...Ch. 26 - Give an example of a qualitative factor that...Ch. 26 - How are investments in sustainability justified?Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Net present value A project has estimated annual...Ch. 26 - Net present value A project has estimated annual...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Net present valueunequal lives Project A requires...Ch. 26 - Net present valueunequal lives Project 1 requires...Ch. 26 - Average rate of return The following data are...Ch. 26 - Average rate of returncost savings Midwest...Ch. 26 - Average rate of returnnew product Micro Tek Inc....Ch. 26 - Calculate cash flows Natures Way Inc. is planning...Ch. 26 - Cash payback period for a service company Prime...Ch. 26 - Cash payback method Lily Products Company is...Ch. 26 - Net present value method The following data are...Ch. 26 - Net present value method for a service company AM...Ch. 26 - Net present value methodannuity for a service...Ch. 26 - Net present value methodannuity Briggs Excavation...Ch. 26 - Net present value method for a service company...Ch. 26 - Present value index Dip N Dunk Doughnuts has...Ch. 26 - Net present value method and present value index...Ch. 26 - Average rate of return, cash payback period, net...Ch. 26 - Cash payback period, net present value analysis,...Ch. 26 - Internal rate of return method The internal rate...Ch. 26 - Internal rate of return method for a service...Ch. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Net present value method and internal rate of...Ch. 26 - Identify error in capital investment analysis...Ch. 26 - Net present valueunequal lives Bunker Hill Mining...Ch. 26 - Net present valueunequal lives Daisys Creamery...Ch. 26 - Sustainable energy capital investment analysis...Ch. 26 - Sustainable product capital investment analysis...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Communication Global Electronics Inc. invested...Ch. 26 - Personal investment analysis for a service company...Ch. 26 - Qualitative issues in investment analysis The...Ch. 26 - Net present value method for a service company...

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