The Accounting Rate of Return and the DCF Rate of Return

Abstract

The accounting rate of return on capital employed (RRCE) still enjoys extraordinary popularity as a criterion of achieved financial performance, as a divisional and corporate financial objective, and as a public policy index of relative profitability. Its popularity may in no small way lie in the presumption that the RRCE provides, in the form of a single magnitude, a comprehensive criterion for measuring the ex post and ex ante profitability of capital investment. Moreover, the components of the RRCE calculation can be taken directly from the traditional accounting records — the hallmark of respectability.