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Economics, Energy Management and Conservation
Published in Radian Belu, Energy Storage, Grid Integration, Energy Economics, and the Environment, 2019
In Equation (5.29) the only unknown is the interest rate, i. A second simplified approach to capital budgeting is the accounting rate of return method, very similar to the rate of return analysis, but can be applied regardless range of the interest rates or economic activity. It is considered to be simplified because it is not using time value of money in evaluating capital investments. This capital budgeting method uses net income, not cash flows. The accounting rate of return (ARR) method calculates the return generated from the average net income expected for each of the years the proposed capital investment is expected to be used in operations. It is like the rate of return concept; however, this return is based on a single proposed asset acquisition, while the rate of return in financial accounting is based on the return generated by a company, project or installation total assets. The calculation of accounting rate of return is calculated as: () ARR=Average Net IncomeAverage Investment
Internal rates of return and shareholder value creation
Published in The Engineering Economist, 2021
The Return On Investment (ROI) is a well-known accounting rate of return. On one hand, it is often used in industrial applications for measuring economic efficiency and for investment decision-making (e.g., Brimberg et al., 2008; Brimberg & ReVelle, 2000; Danaher & Rust, 1996; Li et al., 2008; Menezes et al., 2015; Myung et al., 1997). On the other hand, it is viewed with suspicion by accounting scholars as well as finance scholars. A long tradition in accounting and finance casts a shadow on its capability of inferring anything about economic profitability of a project or a firm (e.g. Gordon, 1974; Harcourt, 1965; Kay, 1976; Livingstone & Salamon, 1970; Solomon, 1966). The idea of comparing accounting rates of return with a cost of capital seems “like comparing apples with oranges” (Rappaport, 1986, p. 31).