Simple Rate of Return
accounting returna 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.