Which capital budgeting evaluation technique uses accounting net income instead of cash flows to calculate project returns?
AInternal Rate of Return (IRR)
BAccounting Rate of Return (ARR)
CProfitability Index (PI)
DNet Present Value (NPV)
Explanation
* Accounting Rate of Return (ARR) = Average Accounting Net Income / Average Investment.
* Uniquely relies on accrual accounting income rather than cash flow cash timing.
* Ignores time value of money, which is its chief limitation.
Exam Relevance
- Topic: Capital Budgeting
- Subtopic: Non-Discounted Metrics
No Comments