Using the Accounting Rate of Return Method to Evaluate a Budget

Instructions:

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question 1 of 3

Max's desired rate of return for a potential investment is 18%. Which of the following accounting rates of return will tell Max that his potential investment is a good one?

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1. How do you calculate your accounting rate of return?

2.

Carlos is trying to decide whether or not he should purchase a larger warehouse for his company. He wants a desired rate of return of 10%. His expected average annual accounting profit is $50,000 and the cost to purchase the warehouse is $1,230,000.

What is his ARR?

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About This Quiz & Worksheet

This quiz/worksheet combo will gauge your understanding of accounting rate of return and the role it plays in determining a budget for a capital campaign.

Quiz and Worksheet Goals

This quiz will test you on various accounting topics and terms, such as:

  • Determining a good investment
  • Calculating your accounting rate of return
  • Identifying an accounting rate of return from an annual accounting profit and initial investment cost

Skills Practiced

  • Reading comprehension - comprehend key information on how to identify a good investment
  • Knowledge application - use your knowledge to answer a question about determining an accounting rate of return
  • Information recall - access the knowledge you've gained regarding the relationship between an accounting rate of return, annual accounting profit and investment cost

Additional Learning

To learn more information about accounting rate of return, read the lesson entitled Using the Accounting Rate of Return Method to Evaluate a Budget. This lesson will help you more clearly understand the following:

  • Definition of an accounting rate of return (ARR)
  • The formula to calculate the accounting rate of return
  • Definition of a capital budget
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