Demerits of Average Rate of return Method (ARR)

Demerits of Average Rate of return Method (ARR)

1. The most severe criticism of this method is that it ignores the time value of money.
2. Normally, a host of variants are to be resolved relating to its components viz., earnings and investment cost. For example, it may be the gross, net or average investment which is to be considered for computation. This may produce different rates of any one proposal.
3. Another problem in connection with the method is regarding a reasonable rate of return on investments. Some stipulate a minimum rate so that if projects do not satisfy this rate, they are summarily excluded from consideration.