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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

53 Ansichten

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7.1 : Introduction to Capital Budgeting

Capital Budgeting

263 Ansichten

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7.2 : Basics of Investment Decision-making

Capital Budgeting

143 Ansichten

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7.3 : Importance of Capital Budgeting

Capital Budgeting

101 Ansichten

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7.4 : Advantages and Limitations of Capital Budgeting

Capital Budgeting

321 Ansichten

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7.5 : Capital Budgeting Techniques

Capital Budgeting

150 Ansichten

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7.6 : Payback

Capital Budgeting

86 Ansichten

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7.7 : Payback Period

Capital Budgeting

61 Ansichten

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7.8 : Discounted Payback Period

Capital Budgeting

74 Ansichten

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7.9 : Net Present Value

Capital Budgeting

288 Ansichten

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7.10 : Net Present Value Method

Capital Budgeting

169 Ansichten

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7.11 : Decision-making Through Net Present Value

Capital Budgeting

64 Ansichten

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7.12 : Internal Rate of Return

Capital Budgeting

179 Ansichten

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7.13 : Calculating Internal Rate of Return

Capital Budgeting

42 Ansichten

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7.14 : Decision-making Through Internal Rate of Return

Capital Budgeting

47 Ansichten

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