Accounting Rate of Return
Organizations always compare the Accounting Rate of Return to the expected rate of return. This makes it easier to reject or accept a project. If the accounting rate of return is more than or equal to the anticipated rate of return, then the company should undertake the project. On the other hand, when it is lower than the expected rate of return, the company should reject the plan (Thiess & Wright, 2010). Therefore, for Love well company, if the accounting rate of 16.7% is more than the anticipated rate of return, it should take the project. However, if it is less than the expected rate of return, Love Well Company should reject the project.
Benefits of Accounting Rate of Return
Just like the payback period, this method is easy to comprehend and compute because it takes into consideration the total income or savings over the lifecycle of the project. It also considers the value for money because it recognizes crucial issues like the net income and depreciation, which are crucial factors in appraising an investment (Shaban, Al-Zubi & Abdallah 2017, pp175-179). Besides, this method satisfies interest owners, allows the company to compare different product projects with the expenses of reducing the competitive nature of the project, and takes into consideration the idea of accounting profit during its computation.
Limitations
Despite the numerous benefits mentioned above, this method has various drawbacks. .First, this method does not take into consideration the time value for money. Managers ignore the fact that the value for money depreciates with time. Also, this method ignores various crucial factors like cash inflows that are more useful than the profits. Besides, the Accounting rate of return overlooks the life cycle of a project(Thiess & Wright, 2010). However, when computing the average income of the same project, the managers use their life period. For this reason, the average investment may not change regardless of the number of years that the investment takes. Lastly, companies cannot use this method to assess investments that are made in installments at different periods.