In capital budgeting, the accounting rate of return (ARR) decision model:
A) Considers the time value of money.
B) Ignores cash outflows after the initial investment.
C) Incorporates the timing of cash flows.
D) Ignores accounting income generated after the break-even point.
E) Does not provide an unambiguous decision criterion (rule) regarding the acceptance of capital investment projects.

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) decision model does not provide a clear decision criterion on whether to accept or reject a capital investment project. It only calculates the average annual accounting profit as a percentage of the initial investment. Therefore, other factors like the time value of money and the timing of cash flows should also be considered to make a sound investment decision.

In Capital Budgeting, the Accounting Rate of Return (ARR) Decision