Accounting rate of return

This paper presents an analysis of the importance of sound financial planning and investment strategies to ensure future financial well-being. In making investment decisions, investors must use appropriate evaluation methods, such as NPV, IRR, PP, PI, and ARR, each of which has advantages and disadvantages. By understanding these various methods, investors can make more informed and potentially profitable investment decisions in the future. This analysis underscores the significance of sound financial planning and investment strategies to guarantee future financial well-being. In making investment decisions, investors must employ appropriate evaluation methods, such as NPV, IRR, PP, PI, and ARR, each of which possesses advantages and disadvantages. By grasping these diverse methods, investors can make more informed and potentially lucrative investment decisions in the future.

Egypt is located within the Arab region, which is one of the most regions in the world exposed to water scarcity due to the desert nature of the region. This highlights the importance of measuring the efficiency and adequacy of the financial / economic and environmental investments in water sector as capital costs, and to what extent it achieves the desired goals in terms of developing water resources and protecting them from waste and pollution. The research is proposing a logical methodology for linking environmental performance goals in the water resources sector and irrigation with economic performance goals in light of Egypt's Vision 2030 strategy and  calculating the weighted sustainable rate of return on investments (WSROI) for the first time in this sector to measure the profitability of the investments in this vital sector. The essential importance of this research come from the need - in the next years - to raise the sector’s ability to attract foreign investment and private sector to invest in its environmental projects to increase the efficiency of water productivity and rationalize its uses in irrigation. The research reached several recommendations, the most important of which are: 1) The necessity of linking the economic and environmental performance indicators for each program in a systematic way that enables the decision-maker to track the impact of implementing these programs economically and environmentally to ensure the achievement of water resources and
irrigation strategy goals 2030. 2) Although SROI or WSROI is likely to be used to measure the sustainable rate of return, the weighted sustainable rate of return (WSROI) shows clearer degrees of impact, indicating that it is more effective in presenting the contribution degree in achieving sustainable development.

Geoffrey Colin Harcourt’s work on the interface between accountancy and economics is a part of his legacy that is less well-known than his work on the capital controversies. This paper argues that the analytical findings of this research effort are an important and integral part of Harcourt’s overall research programme. In this paper we review Harcourt’s work on the relation between economics and accounting from the time of his undergraduate thesis to 1969, the date of the publication with Robert Parker of the edited volume Readings in the Concept and Measurement of Income. This paper intends to offer insights on A) the evolution of Harcourt’s thought during this period and a survey of the significant contributions he made to research in this field during this time, and B) the legacy of his approach and findings. We argue that his ideas in this domain offer important insights in doing post-Keynesian economics in the Harcourt mould. We find that Harcourt’s insights on the issues relating to the accounting rate of profit as used by economists remains relevant to today, as well as his implicit suggestions on how to deal with the complexities of the problems that ensue both for the theorist, practical economist, businessman, and policy advisor. Harcourt’s work suggests that we should not aim to replace one monolithic way of seeing things with another, indicating that the useful definition of key concepts and tools is determined by the problem and hence by the policy question one wants to answer.

Accounting information is used for measuring firm performance in various financial applications-a practice supported by empirical studies demonstrating the value relevance of accounting numbers, but disputed by theoretical papers arguing that a firm's accounting rate of return (ARR) serves poorly as a proxy for its internal rate of return (IRR). We derive a new model of the ARR-IRR relation, and describe how the conservatism of GAAP constrains a firm's IRR to fall in a range bounded by its historical growth rate and ARR. Using cross-sectional data, we demonstrate that economic returns can be estimated from accounting numbers for many firms. We link empirical results to underlying economic theory, and thus contribute to understanding why accounting information is value relevant.

Many studies have questioned empirical utilization of accounting data, as internal rates of return would be more consistent with the relevant economic concept. The paper investigates the dynamic relationships between different measures of accounting rates of return (ARRs) and an estimated internal rate of return (IRR). In contrast with the prevailing case-study investigations, we consider a panel for quoted Brazilian firms in the manufacturing industry for the 1988-3/2003-2 period. Granger causality tests are considered and the results indicate a bi-directional causality pattern when ROA (Net Profits/Total Assets) is considered as the accounting measure. This seems to indicate that there is some validity in using accounting rates of return in certain economic settings, especially when long time series are considered.

Many studies have questioned empirical utilization of accounting data, as internal rates of return would be more consistent with the relevant economic concept. The paper investigates the dynamic relationships between different measures of accounting rates of return (ARRs) and an estimated internal rate of return (IRR). In contrast with the prevailing case-study investigations, we consider a panel for quoted Brazilian firms in the manufacturing industry for the 1988-3/2003-2 period. Granger causality tests are considered and the results indicate a bi-directional causality pattern when ROA (Net Profits/Total Assets) is considered as the accounting measure. This seems to indicate that there is some validity in using accounting rates of return in certain economic settings, especially when long time series are considered.

The internal rate of return (IRR) is used extensively in the real estate sector, notwithstanding certain nagging deficiencies taught in most business school texts. One of those deficiencies is that the IRR may have multiple solutions which cannot be reconciled. Unbeknownst to most practitioners, this "nagging deficiency" has been refuted in the last decade, seemingly great news for IRR advocates.