What are the advantages of using the accounting rate of return?

The accounting rate of return (ARR) is advantageous due to its simplicity, use of accounting information, and focus on profitability.

The accounting rate of return is a straightforward and easy-to-understand method of evaluating the potential profitability of an investment. It calculates the return on an investment based on the profits that the investment is expected to generate, rather than the cash flows. This makes it a simple and intuitive measure that can be easily understood by those without a deep understanding of finance or accounting.

One of the key advantages of the ARR is that it uses accounting information that is readily available from a company's financial statements. This means that it does not require any additional or specialised information, making it a convenient and cost-effective method of evaluating investments. It uses net income, which is a figure that most businesses are familiar with and regularly calculate. This makes the ARR a practical tool for businesses of all sizes and across all industries.

Another significant advantage of the ARR is that it focuses on profitability rather than cash flows. This can provide a more accurate picture of the potential return on an investment, as it takes into account all revenues and expenses, not just cash inflows and outflows. This can be particularly useful for businesses that have significant non-cash expenses, such as depreciation or amortisation.

Furthermore, the ARR provides a percentage return, which can be easily compared with the returns from other potential investments or with the company's required rate of return. This makes it a useful tool for decision-making, as it allows businesses to quickly and easily compare the potential profitability of different investment opportunities.

In conclusion, the accounting rate of return is a simple, practical, and effective method of evaluating the potential profitability of an investment. It uses readily available accounting information, focuses on profitability, and provides a percentage return that can be easily compared with other investments.