Corporate financial policy ( Finance)

timer Asked: Feb 5th, 2018
account_balance_wallet $15

Question description

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.
(Graham & Harvey)

( De Jong & Koedijk)
( Bancel & Mittoo)

Sent from my iPhone

Tutor Answer

School: UIUC

Hello buddy, have a look at the work and kindly let me know if there is any clarification you may need. Looking forward to our next assignment. A ll the best

●The Accounting Rate of Return (ARR) Method uses accounting income.
●The average annual income is d...

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Outstanding Job!!!!

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