A disadvantage associated with the use of the accounting rate of return method for assessing investment opportunities is:

Question

Quizplus · Accepted Answer

Option B: The accounting rate of return method uses an accrual approach that takes into consideration the expected revenues and expenses related to an investment. This approach is more focused on financial reporting rather than actual cash flows. Therefore, it may not present an accurate picture of the true economic profitability of an investment opportunity.
Option C: The accounting rate of return method does not consider the time value of money, which means that it does not take into account the potential for future cash flows to be reinvested at a different interest rate. This may lead to an inaccurate evaluation of the actual profitability of an investment opportunity over the long term. Therefore, option D is the correct choice as it offers a combination of both the reasons.

A Disadvantage Associated with the Use of the Accounting Rate