Accounting Rate of Return and Payback Period are methods better used for capital investments that have a relatively short lifespan such as computer equipment and software.

Question

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Both the Accounting Rate of Return (ARR) and Payback Period methods are focused on short-term returns and are better suited for capital investments that have a relatively short lifespan, such as computer equipment and software. The ARR is based on the expected annual net income divided by the initial investment and is useful for evaluating the profitability of a project over a specific period. The Payback Period method, on the other hand, estimates how long it takes for the initial investment to be repaid from the project's expected cash flows. Both methods are not as effective for long-term capital investments, such as infrastructure or real estate, as they do not account for the time value of money over the project's entire lifespan.

Accounting Rate of Return and Payback Period Are Methods Better