The accounting rate of return is calculated as:
A) The after-tax income divided by the total investment.
B) The after-tax income divided by the average investment.
C) The cash flows divided by the average investment.
D) The cash flows divided by the total investment.
E) The average investment divided by the after-tax income.

Question

Quizplus · Accepted Answer

The accounting rate of return is a measure of profitability that calculates the average annual net income of an investment as a percentage of the initial investment. It is calculated by dividing the after-tax income by the average investment. Option A and D are not correct as they use the total investment instead of the average investment. Option C is incorrect as it divides cash flows by average investment, while accounting rate of return is based on net income, not cash flows. Option E is also incorrect as it divides the average investment by after-tax income, which is not the formula for the accounting rate of return.

The Accounting Rate of Return Is Calculated As