Mixed Methodology of Accounting Rate of Return Grade Assessment
Introduction
Accounting rate of return (ARR) is a measure of profitability that evaluates profitability by comparing the projected income with the investment cost.The method is relatively simple yet very effective way for determining the profitability of any proposed project or investment. Companies use this method to assess their proposed projects or investments by evaluating the amount of return made on each dollar of investment. The ARR evaluation provides the company with information on how effective the proposed project or investment can be in providing a return on the capital invested.
Objectives
The objective of this paper is to present a mixed methodology of accounting rate of return grade assessment. The main goal is to determine the best grade approach to use in evaluating the proposed projects or investments. In order to do this, a thorough examination of various methods and formulas utilized in calculating ARR will be conducted. Additionally, we will compare the different rating approaches and derive a conclusion concerning which one is most effective for evaluating projects or investments. Furthermore, the paper will seek to provide insights into how to improve the grade assessment process.
Methods and Formulas
The most widely used methods and formulas for calculating ARR are the Internal Rate of Return (IRR), Modified Internal Rate of Return (MIRR) and Discounted Cash Flow (DCF) analysis. IRR is defined as the ‘net annualized rate of return that a business earns on its entire net investment made in the project’. It is calculated by discounting all future cash flows associated with the particular project. This rate depicts the return of a project by measuring investments against estimated returns. Modified Internal Rate of Return (MIRR) is often used when a business owner is trying to compare returns from potential investment opportunities. It is a variation of the standard IRR which takes into account the use of equity and debt financing. The MIRR is calculated by discounting the present value of all future cash flows at the firm’s cost of debt and the cost of equity. Finally, the Discounted Cash Flow (DCF) analysis is a method of valuing a project or business opportunity by discounting all future estimated cash flows back to the present. This method is often used when a business is looking to make a decision between multiple investment opportunities.
Grade Assessment
When evaluating a project or investment opportunity, the ARR grade assessment is used to measure the financial impact of the proposed opportunity. The grade assessment typically involves the comparison of a proposed project or investment against a benchmark figure. For example, if the benchmark figure is 10%, then it means that any project or investment opportunity with an ARR of 10% or higher is deemed to have good return in a standard evaluation.
Different rating systems are used in different situations depending on the type of project or investment being evaluated. For instance, a rating system with a range from A+ to F can be used to evaluate the success of a proposed project or investment. This system is often used when the investor is looking for an absolute rate of return. In some cases, a letter grade system may be used in which ratings such as D, C+, B-, A+ are assigned based upon the estimated returns for a proposed project or investment. This system is more subjective and relies more heavily on the judgment of the investor.
Another approach to grade assessment is the portfolio approach. This method is more suited for investments with multiple capital streams as it allows investors to diversify their portfolios among different projects or investments and then assess the portfolio as a whole. This approach is based on the idea of diversifying risk to reduce volatility and thereby, reducing the overall risk of the portfolio.
Conclusion
The ARR grade assessment is used to evaluate the profitability of a proposed project or investment. Different methods and formulas can be used to calculate ARR and various rating systems can be implemented to evaluate the success of the investment or project. Although each system has its own merits and drawbacks, the portfolio approach is generally the most effective system for evaluating projects or investments with multiple capital streams. By diversifying risk, investors are able to minimize volatility and maximize the return on their investment. This approach allows for a more comprehensive and accurate assessment of the potential success of a project or investment.
