Questions: The formula to calculate the accounting rate of return is: annual income/average investment annual income/initial investment annual income before tax/average investment

The formula to calculate the accounting rate of return is: annual income/average investment annual income/initial investment annual income before tax/average investment
Transcript text: The formula to calculate the accounting rate of return is: annual income/average investment annual income/initial investment annual income before tax/average investment
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Solution

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The answer is the first one: annual income/average investment.

Explanation for each option:

  1. Annual income/average investment: This is the correct formula for calculating the accounting rate of return (ARR). It measures the return on an investment based on the average amount invested.

  2. Annual income/initial investment: This is incorrect for ARR, as it uses the initial investment rather than the average investment over the period.

  3. Annual income before tax/average investment: This is incorrect because ARR typically uses net income (after tax) rather than income before tax.

In summary, the correct formula for ARR is annual income divided by average investment.

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