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#analyst-notes #cfa-level-1 #corporate-finance #has-images #reading-35-capital-budgeting #study-session-10
Average Accounting Rate of Return
(not required)
This is a very simple rate of return:
Its only advantage is that it is very easy to calculate.
Drawbacks:
- It does not take into account the time value of money; the value of cash flows does not diminish with time, as is the case with NPV and IRR.
- ARR is based on numbers that include non-cash items.
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Subject 3. Investment Decision Criteria
be tied up in a project and "at risk." The shorter the payback period, the greater the project's liquidity, the lower the risk, and the better the project. The payback is often used as one indicator of a project's risk. <span>Average Accounting Rate of Return (not required) This is a very simple rate of return: Its only advantage is that it is very easy to calculate. Drawbacks: It does not take into account the time value of money; the value of cash flows does not diminish with time, as is the case with NPV and IRR. ARR is based on numbers that include non-cash items. Profitability Index (PI) This is an index used to evaluate proposals for which net present values have been determined. The profitability index is determined b
Subject 3. Investment Decision Criteria
be tied up in a project and "at risk." The shorter the payback period, the greater the project's liquidity, the lower the risk, and the better the project. The payback is often used as one indicator of a project's risk. <span>Average Accounting Rate of Return (not required) This is a very simple rate of return: Its only advantage is that it is very easy to calculate. Drawbacks: It does not take into account the time value of money; the value of cash flows does not diminish with time, as is the case with NPV and IRR. ARR is based on numbers that include non-cash items. Profitability Index (PI) This is an index used to evaluate proposals for which net present values have been determined. The profitability index is determined b
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