Simple rate of return

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Simple rate of return

The return from investments figured by dividing income plus capital gains by the amount of capital invested. The effect of compounding is not taken into account.

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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The most commonly prescribed capital budgeting techniques in the public finance literature include net present value (NPV), internal rate of return (IRR), benefit-cost ratio (BCR), payback period (PBP), and accounting rate of return (ARR).
Several models are commonly used to evaluate capital budgeting projects: the payback, accounting rate of return, present value, internal rate of return, profitability index models and others.
The accounting rate of return is the ratio of the project's average after-tax income to its average book value.
The most preferable investment criteria for investment evaluations were IRR, followed by accounting rate of return (ARR), and NPV.
The Accounting Rate of Return gives an approximation for an asset purchase or project and the effect on the company's overall ROCE can be assessed.
Investment appraisal tools such as accounting rate of return, net present value and the capital asset pricing model.
Capital budgeting chapters usually focus on widely used decision models, such as net present value (NPV), internal rate of return (IRR), accounting rate of return (ARR), profitability index (PI), and the payback period (PB), and are often enhanced with analyzing tax implications in capital budgeting decisions.
Included appendices provide example documents and information on profit calculations and accounting rate of return.

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