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What are the differences (Atleast 3) between accounting rate of return and internal rate of return...

What are the differences (Atleast 3) between accounting rate of return and internal rate of return methods?

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Answer #1

1.
ARR uses accounting profits while IRR uses cash flows.

2.
IRR uses discounted cash flow approach, i.e., takes the time value of money into account but ARR does not take the time value of money into account

3.
ARR is average annual income from project divided by avergae initial investment. IRR is the rate at which present value of dollars invested in a particular project would equal present value of cash inflows from project.

4.
the decision criterion for IRR is based on the cost of capital, the decision criterion for ARR is set by the management.

5.
IRR doesn't have specific formula, but is established through trial-and-error approach. But ARR is calculated by dividing average annual profit by average net book value of investment.

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