Accounting Rate of Return (ARR) is computed as:
ACash Flow / Initial Investment
BAverage Annual Profit (after tax) / Average Investment
CEBIT / Sales
DNet Profit / Total Equity
Answer & Solution
Correct answer: B. Average Annual Profit (after tax) / Average Investment
1. ARR = Avg Annual Profit after tax / Avg Investment.
2. Average Investment = (Initial + Salvage) / 2 (when straight-line depreciation).
3. Ignores time value of money.
_Source: ICAI BoS CA Inter Paper 6A, Ch 7 "Investment Decisions", §6 — ARR_