The accounting rate of return model ignores the time value of money.

Question

Quizplus · Accepted Answer

The accounting rate of return model, also known as the average rate of return model, is calculated by dividing the average annual profit generated by an investment by the initial investment cost. However, this model ignores the time value of money, which assumes that a dollar received today is worth more than a dollar received in the future due to inflation, interest, and other factors. Therefore, this model may not accurately reflect the profitability or cost-effectiveness of an investment over time.

The Accounting Rate of Return Model Ignores the Time Value