Corporate financial policy ( Finance)

Anonymous
timer Asked: Feb 5th, 2018
account_balance_wallet $5

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.

https://faculty.fuqua.duke.edu/~charvey/Research/Published_Papers/P67_The_theory_and.pdf
(Graham & Harvey)

file:///C:/Users/purdu/Downloads/ERS%202005%20005%20FA.pdf
( De Jong & Koedijk)

https://home.cc.umanitoba.ca/~umittoo/publications/FM%20Cap%20Structure%202004.pdf
( Bancel & Mittoo)

https://strategiccfo.com/capital-budgeting-methods-2/

https://www.accountingformanagement.org/payback-method/

http://www.commerce.uct.ac.za/accounting/staff/personalpages/ccorreia/Corporate%20Financial%20Management/Documents/2007/Readings/Capital%20Budgeting%20Practices%20Fortune1000%202002.pdf

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Tutor Answer

TutorYoungblood
School: Boston College

Attached.

●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 w...

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Anonymous
Thanks, good work

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