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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

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

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

Internal rate of return method

Internal rate of return method is one of the capital investment methods which determine the rate of return, wherein the net present value of all the cash flows (both positive and negative) from an investment is zero. This method is also called as the time-adjusted rate of return method. It used to evaluate the different proposal’s expected rate of return.

To determine: The reasons for the difference between the average rate of return and the internal rate of return on the same project.

Explanation

The reasons for the difference between the average rate of return and the internal rate of return on the same project are as follows:

1. Average rate of return method doesn’t consider the expected cash flows from the investment proposals ...

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