Question

Without using formulas, provide a definition of average accounting return (AAR). 

1. A ranking method used to assess projects. Pl greater than 1 signify positive NPV projects, while Piless than 1 signify negative NPV projects. 

2. A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment 

3. A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. 

4. A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. 

5. A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost. 

Answer 1

The correct answer is option d

Explanation:- The average accounting return is an impotant capital budgeting technique to decide whether a project should be accepted or rejected. It signifies the amount of profit that a project can earn based on the initial investment made in the project. It is expressed as a ratio or percentage.

The ranking method is known as profitability index which is described in option a. The method described in option b refers to the net present value method. The method described in option c refers to the payback period method. The method described in option e refers to discounted payback period method.