An investment project has an accounting rate of return of 10.8%.The initial outlay for the investment is $91,000.The hurdle rate is 10.2%.Which of the following indicates a proper interpretation?

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is the ratio of the average annual accounting profit to the initial investment. In this case, the ARR is 10.8%, meaning that on average, the investment generates $10.80 of accounting profit for every $100 of initial investment. Therefore, the correct interpretation is that the investment earns a net income of 10.8 cents on each dollar invested. Option B is incorrect because ARR is based on accounting profit, not cash flow. Option C and D are incorrect because the ARR is not related to dollar of sales generated.

An Investment Project Has an Accounting Rate of Return of 10.8%.The