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
â—The Accounting Rate of Return (ARR) Method uses accounting income.
â—The average annual income is divided by the initial or average investment to find ARR.
â—ARR is one of the least popular capital budgeting methods with management, as per research.
â—Key Advantages and Disadvantages:
â—‹Based on accounting profit.
â—‹Simple and easy to calculate.
â—‹Ignores the time value of money.
â—‹Ignores cash flow from investment.
â—The acceptance of this method is gradually reducing.
slide 2( IRR)
â—Internal Rate of Return compares and evaluates different investments based on their cash flows.
â—A discount rate is applied that results in the present value of future net cash flows equal to zero.
â—IRR is the most used capital budgeting method, as per research.
â—Key Advantages and Disadvantages
â—‹It utilizes the time value of money.
â—‹Shows return on original investment.
â—‹Can give conflicting answers for mutually exclusive projects.
â—‹Gives multiple rates when a negative cash flow is involved.
â—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/
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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