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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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

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

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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