From the course: Accounting Foundations: Managerial Accounting

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The unadjusted rate of return method

The unadjusted rate of return method

From the course: Accounting Foundations: Managerial Accounting

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The unadjusted rate of return method

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- Another commonly used capital budgeting technique is the unadjusted rate of return method. This is also referred to as the simple rate of return method or the accounting rate of return method. The unadjusted rate of return is computed as follows, you take your increase in future average income and divide it by your initial investment cost. The result is your unadjusted rate of return. Now note the word unadjusted in the title. This technique refers to the fact that the calculations are not adjusted for the time value of money. You should also remember that this technique is based on income measures rather than cash flow measures. To illustrate the unadjusted rate of return consider the following scenario. Sealright company manufactures cans for fruits, vegetables, and other farm produce. Management wants to add a new, larger size can to the product line in order to take advantage of potential demand for food storage items…

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