093 682 682 | 078 868 848 | info@pp-hr.com | Join Discussion | ខ្មែរ | English  | 日本語 | 中文  | ไทย한국어Tiếng Việt

AVERAGE ACCOUNTING RETURN (AAR)

THE AVERAGE ACCOUNTING RETURN (AAR)

AAR=Average net income/Average book value

Average book value or average investment can be exchanged

Project Decision:

  • AAR > target AAR, so accept the project
  • AAR < target AAR, so reject the project

Advantages for Average Accounting Return (AAR):

  • Easy to calculate
  • Needed information will usually be available.

Disadvantages for Average Accounting Return (AAR):

  • Not a true rate of return; time value of money is ignored.
  • Uses an arbitrary benchmark cutoff rate.
  • Based on accounting (book) values, not cash flows and market values.

Example:

Company is evaluating whether buy a store in a new mall or not. The purchase price is $500,000. We will assume that the store has an estimated life of five years and will need to be completely scrapped or rebuilt at the end of that time. The projected yearly sales and expenses figures are shown below:

You are required to evaluate the project if company wants target average accounting return of 15%.

Solution:

Average net income=(100,000+150,000+50,000+0-50,000)/5 = $50,000
Average Book Value=(500,000+400,000+300,000+200,000+100,000+0)/6=$250,000
AAR=Average net income/Average book value=$50,000/250,00= 20%
The firm has a target AAR  of 15% less than 20%, then this investment is acceptable.

Source:

  1. Phnom Penh HR
  2. Mcgraw-Hill – Fundamentals Of Corporate Finance

Find Jobs Here !

Featured Jobs

Salary 600$ – 700$ Requirement Have experience with sale 3 year Language English Honest If Foreigner Priority Computer word and excel
Salary Range: 400$-600$ JOB Responsible Make account payable (A/P) and account receivable (A/R) Manage petty cash monthly and reports to GM Manage bank reconciliation and cash flow. Maintain invoices to be expended. Checking market supplies of advance request Verifying accounting report in weekly and monthly   JOB Requirements High school or above in related field At least 1 year of Professional
Salary Range: 300$ Up REQUIREMENT • Language English & Chinese • Computer Word and Excel   Contact : 093 682 682 / 078 868 848 Email : cv@pp-hr.com Address: Sangkat Chatomuk, Khan Chamkar Morn, Phnom Penh, Cambodia.
Salary Range: 350$ Up REQUIREMENT • Language English & Chinese • Computer: Word and Excel Contact : 093 682 682 / 078 868 848 Email : cv@pp-hr.com Address: Sangkat Chatomuk, Khan Chamkar Morn, Phnom Penh, Cambodia.
 លក្ខខ័ណ្ឌជ្រើសរើស 1. ត្រូវចេះភាសាចិន 2. អាចប្រើប្រាស់ភាសារអង់គ្លេស (និយាយ និង សរសេរក្នុងការទំនាក់ទំនងអតិជន) • Contact : 093 682 682 / 078 868 848 • Email : cv@pp-hr.com • Address: Sangkat Chatomuk, Khan Chamkar Morn, Phnom Penh, Cambodia.
Loading...