5. Average accounting return [LO 9.4] Concerning AAR:

1. Describe how the average accounting return is usually calculated, and describe the information this measure provides about a sequence of cash flows. What is the AAR criterion decision rule?

2. What are the problems associated with using the AAR to evaluate a project’s cash flows? What underlying feature of AAR is most troubling to you from a financial perspective? Does the AAR have any redeeming qualities?