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Accounting Rate of Return vs. Economic Rate of Return
Author(s) -
GORDON LAWRENCE A.
Publication year - 1974
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.1974.tb00867.x
Subject(s) - rate of return , internal rate of return , time weighted return , return on investment , modified internal rate of return , economics , investment performance , return of capital , return on capital employed , holding period return , rate of return on a portfolio , expected return , actuarial science , return on capital , investment (military) , financial economics , finance , microeconomics , capital formation , financial capital , profit (economics) , portfolio , production (economics) , politics , portfolio optimization , political science , law
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.