accounting return

Simple Rate of Return

An estimate of the return on an investment. It is calculated simply by finding the investment's profit before taxes and interest expenses. The simple rate of return is easy to calculate but is not always accurate because it considers the investment's profit rather than cash flow. It also does not take into account the effects of compounding. It is also called the accounting rate of return or the book value method.
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accounting return

accounting return

a criterion used in INVESTMENT APPRAISAL to evaluate the desirability of an INVESTMENT project. Accounting return involves calculating the anticipated return on an investment in terms of the average yearly accounting profit expected from the project, expressed as a percentage of the capital invested. Fig. 5 shows a typical calculation for a proposed machine purchase, which in this case promises an accounting return of 36% per year. If a firm's target rate of return for new investment projects was, say, 30% plus, then this particular project would be undertaken.

Whether or not the calculated return is realized depends upon how accurate the future estimates of sales volume, selling prices, materials costs, machine life, etc. turn out to be. Since all investments involve assessments of future revenues and costs they are all subject to a degree of uncertainty This problem, in part, can be handled by undertaking a sensitivity analysis, making not one but three estimates from each item of project cost or revenue (‘optimistic’, ‘most likely’, ‘pessimistic’) to indicate the range of possible outcomes.

References in periodicals archive ?
Culp does not point out that Shimpi constructs his examples by using a firm's accounting return on debt, equity, and ART capital, which casts doubt to the conclusion that ART capital reduces the firm's economic cost of capital.
I also include shareholder return and accounting return on assets as control variables, since these measures indicate whether CEO pay is tied to firm performance.
A cursory reading of articles and books could lead you to believe that the notion of accounting return on investment, or ROI (accounting income divided by accounting asset value), is valid for evaluating investment decisions.
Generally, commercial banking appears to be one of the least risky activities in financial services, as measured by the coefficient of variation of its accounting return on equity (ROE) or its accounting return on assets (ROA).
Fisher and McGowan (1983) and Benston (1985) have been extremely critical of empirical research that utilizes accounting rate of return claiming that accounting return is highly flawed as a measure of economic return.
Given the inherent weaknesses of single measures of performance and in order to capture and probe different strategic objectives of foreign investors and the corresponding roles of IJVs, in this study, IJV performances is measured along two dimensions: accounting return (ROI and ROA), and market growth (domestic sales and export growth).
CM's expected accounting return on investment is 15 per cent, which is calculated as average profits after tax as a percentage of average investment over the life of the assets.
Prior research (Larcker, 1983) and executive surveys (Rich and Larson, 1984) indicate that most performance plan goals are based on earnings per share (EPS) growth and accounting return on equity (ROE).
Hence, if firms choose the accounting performance measure based on efficient contracting then the choice will be a function of the correlation between the accounting return and stock return of the firm.
The control-adjusted performance variables and operating variables all show increases pre- to post-block formation, but only the accounting return variable is (marginally) significant.
A caveat is in order with respect to various accounting return measures such as ROE, ROC, and ROA.
At managerial level, companies use summary measures of aggregate performance, using monetary terms such as profits, accounting returns and market returns, but none of these is perfect on its own.

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