Outline four limitations of the accounting rate of return (ARR) method of appraising new investments.

CPA-Financial-Management-Section-3 Revision kit

Limitations of ARR
– It ignores uncertainty of accounting profits
– It uses accounting profits instead of cashflows.
– Easy to manipulate by changing accounting policies such as depreciation, stock valuation etc.
– It ignores the time value of money.
– It ignores the magnitude of cashflows
– It doesn‟t have a definite decision criteria for a single project.

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