Advantages. The accounting rate of return is a simple calculation that does not require complex math and is helpful in determining a project's annual percentage rate of return. Through this, it allows managers to easily compare ARR to the minimum required return.

What are the advantages and disadvantages of ARR?

The main advantage is that it is easy to understand. The higher the ARR, the more attractive the investment is. (a) ARR ignores the time value of money. The primary weakness of the average return method of selecting alternative uses of funds is that the time value of funds is ignored.

What does average rate of return tell you?

The average rate of return is a way of comparing the profitability of different choices over the expected life of an investment. To do this, it compares the average annual profit of an investment with the initial cost of the investment.