Accounting Income-based Decision Rule

It is the oldest and most established investment decision rules. Here, accounting statements in particular accounting measures of income has been used. I.e., return on capital and return on equity.

AAR: Average net income/Average book value. A project is acceptable if its average accounting return exceeds a target return.

Example of AAR: Assume the initial investment required is $240.

Average net income = (105 + 30+ 0)/3 = $45

Average book value = (240 + 160 + 80 + 0)/4 = $120

AAR = Ave NI/Ave BV = $45/120 = 37.5%