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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

Your boss has suggested that a one-year payback period is the same as a 100% average rate of return. Do you agree? Explain.

To determine

Cash payback method:

Cash payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the long-term investment (fixed assets) of the business.

In simple, the cash payback period is computed as follows:

Cash payback period =Initial costAnnual net cash inflow

Average rate of return method:

Average rate of return is the amount of income which is earned over the life of the investment. It is used to measure the average income as a percent of the average investment of the business, and it is also known as the accounting rate of return.

The average rate of return is computed as follows:

Average rate of return =Estimated average annual incomeAverage investment

To explain: Whether a one-year payback period is same as a 100% average rate of return.

Explanation

A one year payback period is not equal to 100% average rate of return, because the pay...

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