What is an Average Accounting Return?
The average accounting rate of return is the ratio of the average after-tax profit of each period of the project's life to the average book value of each period of investment. When assessing the profitability of investment projects, the ratio is compared with the H-standard value set in advance by the enterprise. If the ratio is higher than the target set value, the investment project is accepted. The advantage of this method is that the accounting data is easy to obtain; the disadvantage is that it does not consider the time value, confuses the accounting surplus with cash flow, and sets the target value more subjectively. [1]
Average accounting rate of return
Right!
- Chinese name
- Average accounting rate of return
- Foreign name
- Average accounting rate of return
- Types of
- Economic terms
- Definition
- An average accounting profit measurement
- The average accounting rate of return is the ratio of the average after-tax profit of each period of the project's life to the average book value of each period of investment. When assessing the profitability of investment projects, the ratio is compared with the H-standard value set in advance by the enterprise. If the ratio is higher than the target set value, the investment project is accepted. The advantage of this method is that the accounting data is easy to obtain; the disadvantage is that it does not consider the time value, confuses the accounting surplus with cash flow, and sets the target value more subjectively. [1]
- There are many different definitions of average accounting return (AAR), but no matter which definition, AAR is:
- An average accounting profit measurement / an average accounting value measurement.