Flashcards in Evaluation and Techniques - Accounting Rate of Return Deck (3):
Accounting Rate of Return
Simple Rate of Return - Assesses a project by leasing the expected annual incremental income from the project a a percent of the initial investment
ARR = (AVERAGE ANNUAL INCREMENTAL REVENUES - AVERAGE ANNUAL INCREMENTAL EXPENSES) / Initial ( or average) investment
Depreciation expense is recognized; this method is based on expected accounting revenues and expenses, only accounting rate of return method that recognizes depreciation.
Income Tax are recognized because tax affects income
Residual value is taken into account to the extent it generates an increase from a gain or decrease from a loss upon disposal