# 4 explain why the accounting rate of return arr is

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4. Explain why the accounting rate of return (ARR) is not recommended as a capital expenditure decision-making tool. 18
5. Compute the internal rate of return (IRR) for a capital project and discuss the conditions under which the IRR technique and the NPV technique produce different results. 19
6. Explain the benefits of postaudit and ongoing reviews of capital projects.
conditions on the value of a project that is already underway. Unexpected changes in conditions can affect the viability of continuing such a project as originally conceived. IV. Summary of Key Equations Equation Description Formula 10.1 Net present value = + = + + + + + + + = n 0 t t t n n 2 2 1 1 0 ) k 1 ( NCF ) k 1 ( NCF ) k 1 ( NCF ) k 1 ( NCF NCF NPV 10.2 Payback period Remaining cost to recover Years before cost recovery Cash flow during the year PB = + 10.3 Average rate of return Value Book Average Income Net Average ARR = 10.4 Internal rate of return NPV t t 0 NCF = =0 (1+IRR) n t = 10.5 Modified internal rate of return PV Cost = TV/ (1 + MIRR) n 20