The Average Accounting Return

Another attractive, but flawed, approach to making capital budgeting decisions involves the average accounting return (AAR). There are many different definitions of the AAR. However, in one form or another, the AAR is always defined as:

Some measure of average accounting profit Some measure of average accounting value

The specific definition we will use is:

Average net income

Average book value

To see how we might calculate this number, suppose we are deciding whether or not to open a store in a new shopping mall. The required investment in improvements is $500,000. The store would have a five-year life because everything reverts to the mall average accounting return (AAR)

An investment's average net income divided by its average book value.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

IV. Capital Budgeting

9. Net Present Value and Other Investment Criteria

© The McGraw-Hill Companies, 2002

PART FOUR Capital Budgeting

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