Answered: “Explain the reasons why the net…

“Explain the reasons why the net present value (NPV) method of investment appraisal is likely to be more reliable than the accounting rate of return method (ARR).”

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 3MC: The third step for making a capital investment decision is to establish baseline criteria for...

See similar textbooks

Related questions

Q: Explain several ways of defining the concept of rate of return on investment?

A: Return on investment is the tool that can be used to measure the performance of the companies. The…

Q: What is a satisfiable investment? When the present value of benefits surpasses the cost of an…

A: This question explains about the present value of benefits surpasses and the cost of an investment…

Q: As a Businessman and Entrepreneur, which do you think is more important between Return On Asset…

A: ROA is the return on assets and ROI is the return on investment.

Q: What is a satisfactory investment? When the present value of benefits exceeds the cost of an…

A: Satisfactory investment refers to an investment wherein the present value of benefits after…

Q: The excess present value method is anchored on the theory that the future returns, expressed in…

A: The excess present value method is also known as a net present value which required the present…

Q: Evaluate how capital management pricing model may be utilised to assess the trade off between risk…

A: Introduction : In simple words, capital asset pricing model can be understood as the valuation model…

Q: d. Explain why NPV is considered technically superior to Payback and Accounting Rate of Return (ARR)…

A: There are various capital budgeting methods that can be used to assess or evaluate various…

Q: Explain the difference between risk and uncertainty in the context of investment appraisal, and…

A: Investment means engaging your funds to generate income for the future. Return from the investment…

Q: Which of the following does not assign a value to a business opportunity using time-value…

A: Answer : D Payback period method

Q: Why are the net present value and the internal rate of return models superior to the payback period…

A: The net present value and internal rate of return techniques are superior to the payback method…

Q: Discuss the difficulties in using Net Present Value [NPV] as an investment appraisal method.

A: The net present value method is used by the company for the evaluation of the profitability of…

Q: One of the following methods are not a method to evaluate projects: Return on investment Discounted…

A: Capital budgeting: It implies to the process of evaluating different projects based on their…

Q: Which of the following methods does not consider the investment’s profitability? a. ARR b. Payback…

Q: Explain what is meant by Accounting Rate of Return (ARR) and Net Present Value (NPV) in the context…

A: Solution:- Accounting Rate of Return (ARR):- It measures the expected profitability from any capital…

Q: While comparing investment returns is an important starting point in evaluating investment…

A: Following are the steps involved in the performance analysis of investments:Identification of the…

Q: The most accurate way to analyze the profitability of an investment is to compute the payback…

A: Payback period is the period for time taken of project to repay the initial investment. Payback…

Q: 1. Why methods and tools of the statistics are so important in investment decision making.

A: Hello. Since your question has multiple parts, we will solve the first question for you. If you want…

Q: Explain Cumulative Investment Return Patterns?

A: Answer: Introduction: Cumulative return is the total amount of money that an individual has…

Q: Which is the most accurate and commonly-used Investment Appraisal Method?

A: The profitability criteria of a project over the other can be considered by doing an analysis, that…

Q: What are the principal objections to the use of the average rate of return method in evaluating…

A: Average rate of return: Under this method, the average net income is used in evaluating the capital…

Q: Discuss the pros and cons of the accounting rate of return as an investment criterion.

A: Definition: Average rate of return method: The average rate of return is the amount of income that…

Q: In pursuing one’s investment objective, which is specified in terms of return requirement and risk…

A: Investment is an activity that is engaged in by people who have savings. It can be in two forms such…

Q: Explain the difference between return of investment versus return on investment.

A: The ratio analysis helps to analyze the financial statements of the business.

Q: Which of the following methods does not consider the investment’s profitability? ARR Payback NPV…

A: Average rate of return (ARR) and Internal rate of return (IRR) are methods of computing rate of…

Q: __________ considers the impact of changing one or more inputs or assumptions on the resulting…

A: Capital budgeting is one of the important process of financial management. By this procedure,…

Q: What is the investment center manager's preferred technique of calculating investment turnover,…

A: It is a unit of a firm that is evaluated based on the usage of its capital rather than the profits…

Q: The Capital Asset Pricing Model (CAPM). Write the financial model assumptions, equations,…

A: The capital asset pricing model was developed in the mid-1960s by William Sharpe, John Linter, and…

Q: Describe the process of Incremental-Investment Analysis?

A: The question is based on the concept of Incremental analysis, the method is a problem-solving…

Q: describe the stages in the financial process and discuss the advantages of a process driving…

A: Financial Process: The term "financial processes" refers to the procedures and techniques that the…

Q: How do we use the computed figure when evaluating an investment alternative?

A: There are various computations available for evaluation of investment alternatives. The rate of…

Q: The minimum acceptable rate of return for an investment decision is called the a. Hurdle rate of…

Q: The third step for making a capital investment decision is to establish baseline criteria for…

A: In order to establish baseline criteria for alternatives for making capital budgeting decisions, the…

Q: Discuss the two variables that must be considered whether you are using the present value of cash…

A: The discounted cash flow approach and the relative valuation approach are both used to value any…

Q: How important is risk to returns and what are the key elements that must be analyzed in this regard…

A: Risk: The Cambridge dictionary gives one of the meanings of the word "risk" as: "to do something…

Q: Critically evaluate the benefits and limitations of each of the different investment appraisal…

A: when evaluating the investment appraisal techniques it is important to understand its benefit as…

Q: Describe the investment analysis?

A: Investment analysis is defined as the process of evaluating an investment for income, risk, and…

Q: why do we need to quantify the investment risk and returns?

A: Almost all investments possess certain risks and return.

Q: What is the relationship between return on capital investment and the risk associated with the…

A: Return on invested capital is referred as an amount of the funds of the corporation, which helps in…

Q: Why are statistical approaches and tools important in investment decision-making?

A: This question explains about the statistical approaches and tools that are important in investment…

Q: Which of the following is a present value method of analyzing capital investment proposals? Uaverage…

A: Cost Accounting: It is the process of collecting, recording, analyzing the cost, summarizing cost,…

Q: Technically, the required return of an investment can be determined by determining the investments…

A: The required return on an investment is the return that is expected and assumed by an investor to be…

Question

“Explain the reasons why the net present value (NPV) method of investment appraisal is likely to be more reliable than the accounting rate of return method (ARR).”

Definition Definition Calculation used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. NPV is calculated as the difference between the present value of cash inflow and cash outflow. NPV is used for capital budgeting and investment planning as well as to compare similar investment alternatives.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Discuss how the Accounting Rate of Return as an investment appraisal method is better than the Net Present Value method.
Explain what is meant by Accounting Rate of Return (ARR) and Net Present Value (NPV) in the context of investment appraisal. Discuss at least TWO advantages and TWO disadvantages of each method.
why net present value is considered to be superior to internal rate of return as an investment appraisal method? Critically evaluate and give an example if possible
Consider the advantages and disadvantages of using the accounting rate of return as an investing criteria.
Which approach to investment analysis is "best" in terms of accounting for both the timing and amount of revenue streams from a potential investment? A. the payback period B. the simple rate of return C. the net present value D. the internal rate of return
Discuss the pros and cons of the accounting rate of return as an investment criterion.
A realized return is the rate of return actually earned on an investment. Group of answer choices True False
Does the accounting (book) rate of return (ARR) method provide a valid (or, meaningful) measureof the return on investment? How about the investment’s internal rate of return (IRR)?
(b) Explain the relationship between net present value and internal rate of return, and show how they may offer complementary methods for evaluating investments.
Explain the difference between return of investment versus return on investment.
The following are investment criteria: net present value, payback, profitability index, average accounting return, and the internal rate of return. Question: Which one of these is the most valuable from a financial point of view, and why? (Answer the question correctly and in-depth.)
Discuss the difficulties in using Net Present Value [NPV] as an investment appraisal method.