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7.15 : Average Rate of Return

The Average Rate of Return (ARR), or the Accounting Rate of Return (AAR), is a commonly used approach in capital budgeting. ARR measures an investment's profitability by comparing the average accounting profit to the average accounting value.

For instance, a retail company considering a $300,000 investment in new inventory management software could use ARR to estimate profitability. If the software is expected to generate an additional $60,000 in annual profits over five years, ARR would give the company a way to gauge the return on this investment.

This metric provides a straightforward way to assess financial performance by calculating the annual return as a percentage of the investment's average book value. While ARR is appealing for its simplicity, it does not account for the time value of money or consider the risks associated with an investment. Despite these limitations, ARR remains applicable for quick, initial investment assessments in capital budgeting.

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Average Rate Of ReturnAccounting Rate Of ReturnARRCapital BudgetingInvestment ProfitabilityAccounting ProfitInvestment ValueFinancial PerformanceAnnual ReturnTime Value Of MoneyInvestment Assessment

Aus Kapitel 7:

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7.15 : Average Rate of Return

Capital Budgeting

93 Ansichten

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7.1 : Introduction to Capital Budgeting

Capital Budgeting

298 Ansichten

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7.2 : Basics of Investment Decision-making

Capital Budgeting

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7.3 : Importance of Capital Budgeting

Capital Budgeting

148 Ansichten

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7.4 : Advantages and Limitations of Capital Budgeting

Capital Budgeting

431 Ansichten

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7.5 : Capital Budgeting Techniques

Capital Budgeting

187 Ansichten

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7.6 : Payback

Capital Budgeting

114 Ansichten

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7.7 : Payback Period

Capital Budgeting

89 Ansichten

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7.8 : Discounted Payback Period

Capital Budgeting

95 Ansichten

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7.9 : Net Present Value

Capital Budgeting

323 Ansichten

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7.10 : Net Present Value Method

Capital Budgeting

211 Ansichten

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7.11 : Decision-making Through Net Present Value

Capital Budgeting

94 Ansichten

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7.12 : Internal Rate of Return

Capital Budgeting

207 Ansichten

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7.13 : Calculating Internal Rate of Return

Capital Budgeting

75 Ansichten

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7.14 : Decision-making Through Internal Rate of Return

Capital Budgeting

81 Ansichten

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