Book rate of return is an unsatisfactory guide to selecting capital projects because
I . It uses accrual accounting numbers
II . It compares a single project against the average of capital rejects.
III . It uses cash flows to gauge the desirability of the project.
A common misstep in regard to capital budgeting is the temptation to gauge the desirability of a project by using accrual accounting numbers instead of cash flows. Net income and book value are affected by the compas choices of accounting methods. A project's true rate of return cannot be dependent on bookkeeping decisions. Another distortion inherent in comparing a single project's book rate of return to the current one for the company as a whole is that the latter is an average of all of a firm's capital projects. Embedded in that average number 'may be a hand Full of good projects melding up for a large number of poor investments.