2. INTRODUCTION TO RATE OF RETURN METHOD MADE BY… PATEL ANKIT D. (130600109027) ELECTRICAL DEPARTMENT GUIDED BY… PROF. V.C.PATEL MECHANICAL DEPARTMENT

3. DEFINATION The simple rate of return method is another capital budgeting technique that does not involve discounted cash flows. The simple rate of return method does not focus on cash flows.Rather it focuses on accounting net operating income.

4. The approach is to estimate the revenue that will be generated by a proposed Investment and then to deduct from these revenues all the projected expenses Associated with the project. FORMULA Simple rate of return =expenses includind depreciation = incremental net opincremental revenues”Incremental erating income)/initial investment*]

5. ADVANTAGES Accounting rate of return is simple and straightforward to compute. It focuses on accounting net operating income. Creditors and investors use accounting net operating imcome to evaluate the performance of management.

6. Disadavantages Accounting rate of return method does not take into account the time value of money.Under this method a doller in hand and a doller to be received in future are considered of equal value. Cash is very important for every busioness.if an investment quickly generated cash inflow.the company can invest in other profitable projects.But accounting rate of return method focus on accounting net operating income rather than cash flow.

7. The accounting rate of return does not remain constant over useful life for many projects. A project may, therefore, look desirable in one period but undesirable in another period.

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