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Define a.) Accounting rate of return b.) Discounted pay back period.
a.) Accounting rate of return.
Accounting rate of return is also know as Average rate of return which gives the financial ratio used in capital budgeting. The ratio takes time value of money factor which calculates the return and the net income can be generated from the proposed capital investment. It is used to show the percentage return. The formula of computation is:
ARR= Average profit/average investment
b.) Discounted pay back period.
Period is not involved with the time value of money and it doesn't even get considered whereas discounted pay back period is another form which involves this and have the real value of cash inflows which are measured in current amount of money which are given as a discount amount. The rate with which they are given at any interest rate are called as Discount rate.
Payback period= year before recovery+ unrecovered cost at the start of year/ cash flow during the year
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