Accounting Rate Of Return Research Articles

Accounting Rate of Return vs. Economic Rate of Return

The accounting rate of return (ARR) has traditionally been used as a surrogate for the economic rate of return (IRR) in evaluating the effectiveness of managements’ capital investment decisions. Over the years, some question has been raised as to the validity of using the ARR as an approximation of the IRR. Several papers have recently come to grips with this question with varying degrees of success. This paper is intended to expose the conceptual differences between these rates of return, with the goal of clearly pointing out just how useful the ARR can be to management.

Relationship between the Accounting and the Internal Rate of Return Measures: A Synthesis and an Analysis

Several recent studies have dealt with the relationships between the internal rate of return (IRR) and various measures of accounting rate of return (ARR), given different sets of conditions. Published studies appear in the literature of accounting, economics, finance, and industrial engineering, with no two of these studies appearing in the same journal. Moreover, none of the studies references any of the others. Hence, there is no coordinated approach to the topic and each adopts a different set of assumptions. The purpose of the present paper is (1) to summarize and review the prior studies, so that their results can be synthesized into an integrated framework. This process reveals a more general class of cases than those previously considered; (2) to derive some propositions dealing with reinvestment of cash inflows and the rate of growth, and (3) to suggest some directions for future research in this general area.