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Unformatted text preview: Average Accounting Return o There are many different definitions for average accounting return o The one used in the book is: Average net income / average book value Note that the average book value depends on how the asset is depreciated o Need to have a target cutoff rate o Decision Rule: Accept the project if the AAR is greater than a preset rate Internal Rate of Return o This is the most important alternative to NPV o It is often used in practice and is intuitively appealing o It is based entirely on the estimated cash flows and is independent of interest rates found elsewhere o Definition IRR is the return that makes the NPV = 0 o Decision Rule: Accept the project if the IRR is greater than the required return...
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