ACCOUNTANTS, TOO, COULD BE HAPPY IN A GOLDEN AGE: THE ACCOUNTANTS RATE OF PROFIT AND THE INTERNAL RATE OF RETURN

IT is now generally accepted that the correct way to estimate the prospective yield from a project is to find that rate of discount at which the present value of the flow of receipts and expenditures attributable to the project is zero. When accountants assess the actual performance of an activity or a firm, however, the methods they use are very different. They subtract some rather arbitrary depreciation figure from the receipts to give a net profit figure, and they assess the value of the capital employed by cumulating expenditures and subtracting these depreciation allowances from them. The rate of return is then measured as the ratio of these two figures. It is recognized from time to time that these two rates of return concepts are rather different, and some analyses of the relationship between them exist.2 Their conclusions make rather depressing reading: Harcourt considers that 'as an indication of the realized rate of return, the accountant's rate of profit is greatly influenced by irrelevant factors, even under ideal conditions' :3 Solomon that 'book yield is not an accurate measure of true yield; the error in book yield is neither constant nor consistent' . Though there are some dissenting views,5 their arguments carry little conviction, and R. Turvey's dogmatic claim that 'the accounting rate of return on total assets of a public enterprise means little. In particular it does not approximate the average of the d.c.f. rates of return on past investments and so does not indicate whether these past investments were, on average, reasonably successful' is probably representative of the currently prevailing opinion.