Advantages of ARR:
- It is simple to calculate and easy to catch.
- With the help of this technique, direct comparisons among proposed projected of varying lives with no built-in-prejudice in favor of short-term ventures can be made.
Disadvantages of ARR :
- This technique ignores time value of money.
- It fails to shed light on yearly rate of return of the project. It may be possible for the project producing higher earnings in the early years to show a lower average rate of return and be rejected in support of other projects.
- Serious errors can happen in selection of projects if corporate managers
Accept projects whose accounting rates are equivalent to the or above some arbitrarily selected cut-off rate, and they reject projects whose accounting rates fall short of the cut-off rate.
- Accounting information is not appropriate for investment decision because it fails to differentiate between cash flowing in and out of the company and book keeping transactions.
- There is no full agreement on the exact measure of the term investment.
Therefore, different managers have different meanings when they refer to ARR.