The Accounting Rate of Return uses the accounting information as revealed by financial statements, to measure the profitability of an investment. The accounting rate of return is the ratio of average after tax profit divided by average investment.
Here average income is adjusted for interest. Of the various accounting rate of return, the highest rate of return is taken to be the best investment proposal. In case the accounting rate of return is less than the cost of capital or the prevailing interest rate than that particular investment proposal is rejected.
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