Question

Which of the following project evaluation methods focuses on accounting income rather than cash flows? None of the answers is correct. Payback period. Accounting rate of return. Net present value. Internal rate of return.

Answer 1

Answer:

The correct answer is letter "B": Accounting rate of return.

Explanation:

The rate of return is the earnings that the asset produces in excess of its initial cost. The figure is generally calculated as an annualized percentage. The rate of return can be determined based on the cash flows produced by the asset. Besides, this could involve an element of capital gain. The rate of return can be negative if the asset generates less profit than its cost.

The Accounting Rate of Return measures the return of a specific project in percentage terms. It is mostly used when the firm develops different projects at the same time allowing them to find out which one is more profitable.