The average accounting return:
A) Reflects the projected net effect of the cash flows from a project on the overall firm.
B) Is comparable to the return on assets and thus provides a similar measure of performance.
C) Reflects the anticipated net impact of a project on the shareholders of the firm.
D) Rule, when applied, guarantees that only projects that increase shareholder wealth will be accepted.
E) Ignores all income produced by a project after an arbitrarily assigned cutoff point.

Question

Quizplus · Accepted Answer

The average accounting return (AAR) is a financial ratio that compares the average net income of a project to its average book value, similar to how the return on assets (ROA) measures a company's efficiency at using its assets to generate earnings. This makes it a comparable measure of performance to ROA, as both focus on the relationship between earnings and the asset base.

The Average Accounting Return