I have these two slides presentation about accounting rate of return(ARR) and internal rate of investment( IRR), so i need explanation for each points in the slide using the source down below.
(Accounting Rate of return) slide 1
●The Accounting Rate of Return (ARR) Method uses accounting income.
●The average annual income is divided by the initial or average investment to find ARR.
●ARR is one of the least popular capital budgeting methods with management, as per research.
●Key Advantages and Disadvantages:
○Based on accounting profit.
○Simple and easy to calculate.
○Ignores the time value of money.
○Ignores cash flow from investment.
●The acceptance of this method is gradually reducing.
slide 2( IRR)
●Internal Rate of Return compares and evaluates different investments based on their cash flows.
●A discount rate is applied that results in the present value of future net cash flows equal to zero.
●IRR is the most used capital budgeting method, as per research.
●Key Advantages and Disadvantages
○It utilizes the time value of money.
○Shows return on original investment.
○Can give conflicting answers for mutually exclusive projects.
○Gives multiple rates when a negative cash flow is involved.
●Highly levered firms, public firms, firms that pay dividends are more likely to use IRR than other firms.
( De Jong & Koedijk)
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