Q. Explain demerits of accept-reject criteria?
Demerits of ARR:-
(i) It utilizes accounting income rather than cash flows: - The principal short coming of ARR schema is that it uses accounting income instead of cash flows received from a project. Cash profits are higher than accounting income because cash profits are able to be reinvested during the life of the project itself.
(ii) Time Value of funds not considered: - The subsequent principal short coming of ARR approach is that it doesn't take into account the time value of money. Earning of all the years throughout the life time of the project is given equal weight-age under this method.
(iii) Complex to Fix a Pre-Determined Rate: - It is extremely difficult to fix a pre-determined rate of return with which the actual ARR is compared.