CS Professional · Strategic Management and Corporate Finance · Project Evaluation
Which of the following is a recognised limitation of the accounting rate of return method?
ARR ignores the time value of money. It averages accounting profits across years without discounting, treating a rupee earned late as equal to one earned early, and it relies on accounting profit rather than cash flows.
- AIt uses cash flows rather than accounting profits
- BIt ignores the time value of moneyCorrect
- CIt cannot be computed from financial statements
- DIt considers only the recovery period of the investment
Explanation
ARR uses accounting profit, not cash flow, and treats profits of different years as equal in value, so it ignores the time value of money. It is easily computed from financial statements, and it considers profitability over the whole life, not just recovery time.
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