Question

Which of the following is not an advantage of the average rate of return method?
a. emphasizes accounting income
b. includes the amount of income earned over the entire life of the proposal
c. takes into consideration the time value of money
d. easy to use

Answer 1

Answer:

a. emphasizes accounting income

Explanation:

Average rate of return is calculated using annual returns, for the period for which the investment is made.

The formula to calculate so = $\frac{Average return during the period}{Average investment}$

Where average return during the period = total of return during the entire life of the investment divided into number of years, or tenure of investment.

Average investment = (Opening investment + Closing investment)/2.

Therefore it does not consider the accounting income, it takes into consideration, it considers total return from each particular investment.

Thus emphasizing on accounting income is not an advantage of average rate of return method.