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    Ela Report2

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    Ela Marjorie Estubo
    The document discusses accounting rate of return (ARR), which is a financial ratio used to evaluate capital investments that does not consider the time value of money. ARR is calculated by dividing the net income of a project by the total investment amount. A higher ARR percentage means a more attractive investment, and projects are generally acceptable if their ARR meets or exceeds the required rate of return. Over half of large companies use ARR to appraise potential projects.

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    Ela Report2

    Uploaded by

    Ela Marjorie Estubo
    14 views2 pages
    The document discusses accounting rate of return (ARR), which is a financial ratio used to evaluate capital investments that does not consider the time value of money. ARR is calculated by dividing the net income of a project by the total investment amount. A higher ARR percentage means a more attractive investment, and projects are generally acceptable if their ARR meets or exceeds the required rate of return. Over half of large companies use ARR to appraise potential projects.

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    The document discusses accounting rate of return (ARR), which is a financial ratio used to evaluate capital investments that does not consider the time value of money. ARR is calculated by dividing the net income of a project by the total investment amount. A higher ARR percentage means a more attractive investment, and projects are generally acceptable if their ARR meets or exceeds the required rate of return. Over half of large companies use ARR to appraise potential projects.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    14 views2 pages

    Ela Report2

    Uploaded by

    Ela Marjorie Estubo
    The document discusses accounting rate of return (ARR), which is a financial ratio used to evaluate capital investments that does not consider the time value of money. ARR is calculated by dividing the net income of a project by the total investment amount. A higher ARR percentage means a more attractive investment, and projects are generally acceptable if their ARR meets or exceeds the required rate of return. Over half of large companies use ARR to appraise potential projects.

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    Accounting rate of return, also known as the Average rate of return, or ARR is a financial ratio used in capital budgeting.

    [1] The ratio does not take into account the concept of time value of money. ARR calculates the return, generated from net income of the proposed capital investment. The ARR is a percentage return. Say, if ARR = 7%, then it means that the project is expected to earn seven cents out of each dollar invested. If the ARR is equal to or greater than the required rate of return, the project is acceptable. If it is less than the desired rate, it should be rejected. When comparing investments, the higher the ARR, the more attractive the investment.[2] Over one-half of large firms calculate ARR when appraising projects. [3]

    Basic formulae

    where

    'Payback Period'
    The length of time required to recover the cost of an investment. Calculated as:

    All other things being equal, the better investment is the one with the shorter payback period. For example, if a project costs $100,000 and is expected to return $20,000 annually, the payback period will be $100,000 / $20,000, or five years. The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. The time value of money is the central concept in finance theory. For example, $100 of today's money invested for one year and earning 5% interest will be worth $105 after one year. Therefore, $100 paid now or $105 paid exactly one year from now both

    have the same value to the recipient who assumes 5% interest; using time value of money terminology, $100 invested for one year at 5% interest has a future value of $105.

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